research

Sovereign Wealth Funds: Corruption and Other Governance Risks

To protect their assets for the long term, some countries invest resources and wealth into sovereign wealth funds, which manage a diversified portfolio. But without adequate transparency requirements, these vehicles can be ripe for corruption and other governance risks.

by Jodi Vittori and Lakshmi Kumar
Published on June 26, 2024

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 Secret Lives of Sovereign Wealth Funds

As explained in chapter 2, the current SWF data landscape offers only selective, fragmented visibility into SWFs, and little is known about the investments, operations, or internal management of the vast majority of funds around the world.  This gap creates opportunities for bad actors to abuse funds for their own interests. 

As state-owned entities, SWFs in some ways are set apart from the private investment fund industry, which includes hedge funds, venture capital, and private equity. Notably, an SWF’s mission can go beyond maximizing investment returns to include achieving macroeconomic stability or realizing economic development initiatives domestically. Since they do not have fiduciary duties to private investors and clients, SWFs are completely beholden to the governments that endow them. 

Yet even though their home governments can exert influence over their operations, SWFs in practice behave very similarly to certain types of private investment funds. SWFs are often set up identically to private equity funds, with capital committed to the fund managed by an external general partner. In contrast to popular perception, many SWF investments do not end up in publicly traded companies that have strictly regulated transparency obligations and fiduciary responsibilities. Just like their counterparts in the venture capital, private equity, and hedge fund industries, SWFs often purchase minority stakes in unlisted, privately held companies. And because most countries require little if any transparency about fund transactions made outside of public markets, records of SWF investments in unlisted assets, whether in a private company or a real estate project, are rarely made publicly available. In the wake of the 2007–2008 global financial crisis, SWFs have even begun accruing substantial debt and using leverage to fund some investments, another trademark strategy of the private equity industry. SWFs also often act as co-investors with massive private equity funds. Furthermore, many have adopted their own arcane corporate structures called sub-funds to coordinate sectoral investments. 

There are also large segments of some SWF portfolios that are almost completely absent from public view, whether it be full lists of nongovernmental investors (foreign and domestic), management fees paid to private investment funds, executive compensation, key relationships with intermediary brokers, or corporate structures facilitating investments (especially through offshore companies). Leaked documents provide perhaps the only window on these attributes. Worse, private, third-party SWF data aggregators are significantly dependent on SWFs sharing their underlying data, and access to this data is often prohibitively expensive for most researchers. 

As a result, regulators, journalists, civil society activists, academics, and investors alike are left with regrettably little information about how many SWFs operate. Without detailed financial and operational information, the door is left wide open for rapacious managers and political elites to misappropriate investment earnings. Not only can this lack of transparency make SWFs susceptible to corrupt uses, but at the macroeconomic level, it also raises the specter of real destabilization risks if funds were to fail, be mismanaged, or rapidly withdraw funding from target markets. The lack of oversight into SWFs’ substantial investments could also inflate dangerous equity price bubbles.

Surprisingly, the enormous rise of cross-border SWF investments has not sparked the creation of a centralized international regulatory body to oversee the industry. The closest global institution is the International Forum of Sovereign Wealth Funds (IFSWF), which set forth twenty-four voluntary principles known as the Santiago Principles. These principles aim to improve transparency and governance, but the IFSWF has no power to enforce its own standards, and naming and shaming efforts by other nongovernmental organizations have been mostly absent. As a result, only a select number of SWFs fully adhere to these basic good governance standards, while others are free to invest trillions abroad but disclose little, if any, comprehensive information on their activities to the public.

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.”3 Over $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.

Oil, Sports, and COVID-19 Vaccines: Corruption Risks and Natural Resource–Based Sovereign Wealth Funds

Chapters 4 and 5 examine the mechanisms for elite capture and pathways for reform by examining evidence from two of Africa’s sovereign wealth funds: Angola’s Fundo Soberano de Angola (FSDEA) and Equatorial Guinea’s Fund for Future Generations (FFG).

As described in chapter 4, Angola’s FSDEA sovereign wealth fund—the African continent’s second-largest SWF—was established in 2012 under former president Eduardo dos Santos, with an initial allocation of $5 billion. The fund was created with the country’s oil revenues with a dual mandate: to invest oil revenues back into the domestic economy and to act as a savings fund to preserve Angola’s oil wealth for future generations. 

Conflict of interest concerns were raised when the president appointed his son, José Filomeno dos Santos (also known as Zenu), as chairman of the board, but concerns were assuaged when the fund made a remarkable forty-two-point jump (out of one hundred possible points) in the Peterson Institute’s SWF Scorecard on good governance in a mere three years, plus a good score on another key SWF index.  The FSDEA soon became embroiled in reports of a scandal following allegations of questionable corporate governance and investment practices, however. Media reports beginning in 2017, followed by a 2019 report by the International Monetary Fund (IMF), found that billions of dollars were illegally withdrawn from the FSDEA by an asset manager (and business partner of Zenu) using sophisticated financial transactions that were channeled through offshore financial centers and invested in projects and sectors of personal interest. That the fund gave an outward appearance of good SWF governance despite significant corruption highlights the flawed nature of the current SWF assessment tools, especially those based primarily on self-assessments.

The case in Angola can also exemplify that reform of SWFs is possible, even in fragile states.  Following a change in the presidency and as a result of the scandal, the FSDEA has rolled out a number of corporate governance and regulatory reforms that better reflect international best practices to try to reposition the fund as a credible state-owned investor. 

Another oil-rich African country with an SWF and a regime that international reports have found to be mired in elite capture and corruption is Equatorial Guinea. As described in chapter 5, the country had one of Africa’s highest GDPs per capita at $14,600, but its level of poverty remains one of the highest in the continent, estimated at 67 percent as of 2020.

Equatorial Guinea’s FFG was established in 2002 with a government commitment to deposit 0.5 percent of annual oil revenue into the fund, but it is considered to be one of the least transparent SWFs in Africa with very limited (and in most cases nonexistent) publicly available information. The FFG has no public disclosure of its objectives or mandate, no website, no publicly disclosed governance and institutional framework, no published annual reports, no publicly available information on its board of directors and management, and no publicly disclosed information on asset allocation, investment policy, or fiscal withdrawal rules. Moreover, the leadership of the country exhibits a very high degree of nepotism, and some of the country’s most senior leaders have been convicted of grand corruption. Additionally, oil production long ago peaked there, and the IMF predicts the oil could run out as soon as 2030, making transparency and good governance of the fund an especially time-sensitive priority.

Sovereign wealth funds have especially entered the public consciousness lately due to their nexus with sports, and few countries and their SWFs are so intertwined with sport as Saudi Arabia’s Public Investment Fund (PIF). As described in chapter 6, the emphasis placed on soccer by the PIF since 2016, coupled with the ecstatic local reception of its purchase of the English Premier League’s (EPL) Newcastle United soccer team and subsequent welcome in the city, shine a spotlight on the unconventional returns on investment from such approaches, especially for autocracies like Saudi Arabia. The recent pact between the PIF’s LIV Golf Invitational Series, the European (DP World) Tour sponsored by the United Arab Emirates (UAE), and the Professional Golf Association (PGA) tour has only heightened “sports-washing” concerns.

 “Sports-washing” is a nebulous term that emerged in the 2010s as authoritarian regimes began to actively engage more in the infrastructure and ecosystem of global sports.  Regimes engaged in sports-washing may be able to enhance their popularity through their association with ownership of sports teams or sponsoring major sporting events while de-emphasizing in the minds of the public their involvement in authoritarianism, human rights abuses, organized crime, and corruption.

SWFs are supposed to help generate economic investment at home, but owning sports clubs overseas does little to generate job creation or technology transfer in the investing country. Indeed, many sports institutions, such as the EPL, rarely post any profit, and hosting sports events is often a net financial loss. This reality suggests that financial rates of return were not necessarily uppermost in PIF considerations for its substantial sports investments. Hence, the PIF’s acquisition presents a study of how an SWF may be used for purposes other than economic diversification and national development.

Emergency situations like the COVID-19 pandemic can also lead to activities by SWFs and their intermediaries that raise red flags for conflicts of interest or corruption. Chapter 7 describes the Russian Direct Investment Fund (RDIF) and its role in the creation, production, and marketing of the Sputnik V vaccine. The RDIF has been sanctioned by the U.S. Treasury Department and the European Union; the U.S. Treasury labeled the RDIF “a symbol of Russian kleptocracy” and states that it is widely considered a “slush fund for President Vladimir Putin.”4 It was established in 2011 by order of the then president of Russia, Dmitry Medvedev, and Putin, who was serving as prime minister. It is an unusual form of SWF: rather than investing the proceeds from domestic oil or other natural resources outside of Russia to help diversify the economy, as SWFs normally do, the RDIF focuses on establishing joint ventures with foreign firms and funds for investments within Russia.

The supply chain for countries to purchase the Sputnik V vaccine ran through the RDIF and a company the fund had established called Human Vaccine. Some countries, such as European Union members Slovakia and Hungary, were able to make direct deals with the RDIF’s Human Vaccine subsidiary to buy Sputnik V doses for $20 for the two-dose regimen. Other countries, however, such as Ghana, Guyana, Lebanon, and Pakistan, had to go through another step in the supply chain because Human Vaccine had appointed Dubai-based Aurugulf Health Investments as the exclusive seller and distributor of Sputnik V for countries in Africa and Asia. Aurugulf was registered in October 2020, just two months after Sputnik V was authorized in Russia, and per the company’s website, Sputnik V appears to be its only product. Aurugulf sold the two-shot regime at $38 per two-dose regimen, or almost double the factory price.

The transparency and accountability of funds associated with Sputnik V vaccine-related expenditures decreased when the expenditures were moved off-budget to the RDIF. This move is especially concerning given the kleptocracy associated with the inner circle of the Putin regime. The backgrounds of intermediaries involved in vaccine distribution only heighten concerns about the risks of corruption. The COVID-19 pandemic has revealed an urgent need to improve governance associated with public health—especially during emergency situations and when governance is outsourced to sovereign wealth funds.

Loans, Lottery, Shares, Passports, and Arms: Unique SWF Funding

SWFs are most commonly used as a means to invest excess funds from the proceeds of natural resource exports, as evidenced by the SWFs in Angola, Equatorial Guinea, Saudi Arabia, and Russia. But for the Türkiye Wealth Fund (TWF), the term “sovereign wealth fund” may be a misnomer: the country is chronically short of sovereign wealth because it holds no significant hydrocarbon or mineral deposits and suffers from persistent budget and current account deficits. Instead, TWF acts more like a state-owned holding fund that holds shares in state-owned enterprises (as explained in chapter 8).

When TWF started its operations in 2016 with a founding capital of merely $17 million, critics claimed that the fund would function as a “parallel budget” that the Turkish government could exploit to carry out economic and financial transactions outside of parliamentary oversight and public audits.5 Seven years on, Turkish President Recep Tayyip Erdoğan has used it to reward individual and institutional clients, settle political scores, consolidate economic and political power, and shield his economic and financial policies from parliamentary oversight and public audits. This misuse has further deepened the country’s acute governance deficit and contributed to the economy’s underperformance.

In the absence of any viable revenue stream, the Turkish government transferred state-owned enterprises and assets to TWF, but the fund has failed to demonstrate any value-added through these asset transfers. In January 2017, the government issued a state-of-emergency decree to hand over the national lottery and betting rights to the fund. The Turkish Treasury’s stakes in the country’s two largest public lenders, Ziraat Bank and Halkbank; the state oil company Turkish Petroleum Corporation; the flagship carrier Turkish Airlines; and the former state telecommunications monopoly Turk Telekom were also transferred to TWF shortly thereafter with another state of emergency decree. In 2020, TWF acquired a majority stake in the country’s largest mobile phone operator, Turkcell, through a deal involving questionable offshore deals, conflicts of interest, and irregular transactions. As a result, according to the Sovereign Wealth Fund Institute, the fund’s assets exceeded $279 billion as of 2023.

Meanwhile, the Turkish government turned TWF into a collateral instrument to take out additional loans in an economy with an already sizable debt burden of around $450 billion; there was a need to refinance $170 billion in mainly dollar-denominated loans in 2022 alone. In seeking loans, the fund competes not only with the Turkish Treasury but also with private corporations to access local and international capital markets.

Chapter 9 describes the role that China’s SWFs play in underwriting China’s Belt and Road Initiative (BRI), which has not only supercharged infrastructure investment worldwide but also brought long-standing questions about corruption and political influence to the fore. One key investment sector for SWFs is infrastructure. Infrastructure investment is expected to reach $79 trillion globally by 2040, but alongside extractive industries such as oil and gas, it is the economic sector that remains most strongly associated with corruption risks given that an estimated 20–30 percent of infrastructure project value is lost through corruption.

While China’s policy banks and state-owned commercial banks are the front-end lenders in BRI financing of infrastructure projects, China’s State Administration for Foreign Exchange (SAFE) and its associated China Investment Corporation (CIC) sovereign wealth fund have provided much of the capital, as well as the financial intermediation tools and financial management to move funds from China’s foreign exchange reserves to the BRI’s projects and to help oversee use of the funds.

China’s SWFs have raised some corruption concerns in their own right. A 2016 probe by the Communist Party’s powerful anti-graft body, the Central Commission for Discipline Inspection, reported of CIC that “there were wrongdoings in policymaking and severe problems in the tunneling of interests” and that problems of discipline “occurred frequently.”6 Both SAFE and CIC were reexamined by the commission in early 2022 as part of a broader crackdown on financial sector excess. However, these pronouncements should be treated cautiously given the politicized nature of the anti-corruption campaign.

Instead, the opacity associated with the BRI overall and the way that its financing is disbursed can both be at risk for corruption and conflicts of interest.  There is no formal BRI national membership process or structure, with participation in the BRI most often signified through non–legally binding memorandums of understanding (MOUs) or other, less formal cooperation agreements between China and recipient governments. There is no official list of all BRI projects, nor are there consistent standards, certification schemes, or even branding efforts that signify individual Chinese-backed overseas infrastructure projects as being formally part of the BRI (unless they are explicitly mentioned in MOUs). Estimates of the value of BRI total investment and contract costs range from roughly $965 billion by the American Enterprise Institute as of mid-2023 to $8 trillion by the Center for Global Development as of 2018.

A major BRI corruption concern is that associated with infrastructure projects in BRI recipient countries and so-called debt-trap diplomacy. AidData found that 69 percent of official lending by China between 2000 and 2017 went to countries whose credit ratings scored below the global median and that fully 90 percent of BRI-era official lending went to countries that scored beneath the median of the World Bank’s Control of Corruption index. This problem arises because, in an extension of China’s stated policy of noninterference in other countries’ internal affairs, it generally provides BRI loans with few or no preconditions pertaining to transparency, rule of law, or other factors that shape the wider investment climate.

Moreover, a Peterson Institute study of one hundred bilateral Chinese loans found that all loans since 2014 have included “unusual” and “far-reaching” confidentiality clauses that do not permit borrowers to disclose any of the contract terms or related information.7 This is because, while China’s pre-BRI lending was mostly provided directly to governments, nearly 70 percent is now directed to state-owned companies and banks, special purpose investment vehicles, joint ventures, and private sector firms. These debts, though often substantial, do not appear on the public books—though government liability assurances mean that the public will still be on the hook should something go awry.

One of the more unique SWF mechanisms is Malta’s National Social and Development Fund (NSDF), which has been funded largely through the country’s Citizenship by Investment (CBI) programs, better known as “golden passport” schemes. As evidenced in chapter 10, CBI programs have long enabled the ultra-wealthy, including the very corrupt, to evade scrutiny for misdeeds, to hide assets, and to acquire international mobility by purchasing citizenship in other countries. An SWF that runs a very high risk of being funded using corrupt, laundered, or ill-gotten wealth strikes at the very heart of what the SWF represents by creating a dependency on potentially ill-gotten gains to fund domestic development. Furthermore, for the Maltese government to use an SWF to invest such proceeds is to benefit from the misdeeds of the corrupt and the criminal. It also allows money that may be ill-gotten to move easily through the financial system under the protection that being part of an SWF entails.

Malta is a small island in the Mediterranean Sea that, despite its European Union (EU) member state status since 2004, one analyst has described as a “corrupting island in a corrupting sea.”8 It has had a “disproportionate role as a hub for transnational illicit flows and criminal activities.”9 Malta has had a variety of CBIs; the 2014 iteration was called the Individual Investment Program (IIP), whereby after payments and investments totalling 1.15 million euros ($1.52 million at the average exchange rate for 2014), an individual could become a full-fledged EU citizen with a passport and all the citizenship and travel opportunities this entails.10 Partially in response to public criticism, in 2020, Malta launched a new CBI program with a higher minimum investment cost and more stringent real estate investment requirements.

CBI applicants are supposed to be fully vetted for security risks. These due diligence checks are vitally important given the fact that Malta is a member of the EU and its Schengen Agreement, affording visa-free travel to up to 182 countries. This travel can allow these new citizens to conduct banking and business under looser standards than would be required under their original passports. They also receive all of the rights to privacy and rule of law and protections against any expropriation that are accorded EU citizens. Moreover, the scheme also provides the potential for golden passport holders to do all of this under a new name, enabling them to bypass security checks or flags on their previous identities.

Despite a four-tier due diligence process established to vet applicants, information leaks revealed that several high-profile Russian individuals obtained citizenship through the IIP between 2016 and 2018. These names are just a few of over 700 Russians who by 2018 were able to purchase Maltese citizenship. The same leaks revealed that citizenship applicants tended to come from countries with a higher risk of money laundering.  A plurality of applicants—37 percent—came from Russia, followed by China with 12 percent and Saudi Arabia with 10 percent. 

In addition to concerns about who was receiving the passports, there were also concerns about potential conflicts of interest in administering the fund: the chairman of NDSF had individual interests in several companies that the fund also had stakes in.

The sale of passports was profitable for Malta’s SWF, and the country’s budget deficit shrank dramatically following the introduction of its CBI scheme. But funding a state’s SWF through potentially illicit proceeds undermines a country’s rule of law and its citizen trust in democratic institutions. The development associated with such funding mechanisms can also give ruling parties an edge in elections, helping solidify their state capture. Additionally, it can also create perverse incentives whereby states come to rely on illicit funding to stay afloat. These schemes have the potential to facilitate strategic corruption in Western states by making it easy for authoritarians to seed their crony facilitators abroad under the cover of Western residency or citizenship. In turn, these authoritarians can better help their cronies to avoid sanctions and facilitate the laundering of kleptocratic assets that help keep their regimes in power. Their money can then be used to influence Western politicians and other powerbrokers in ways that may undermine larger national security considerations.

The final case study in this report examines the UAE’s use of side contracts associated with arms sales to fund one of its main SWFs, Mubadala, and SWFs associated with Tawazun—a practice that not only increases corruption risks but also risks larger efforts at peace and security worldwide, as described in chapter 11.

The defense sector has long been recognized for its association with corruption. Around the world, the shielding of large amounts of money and equipment under a veil of national security secrecy creates conditions ripe for bribes, kickbacks, and patronage. Especially worrisome to good governance and arms control advocates is a special kind of arms trade contract known as a defense offset agreement, sometimes referred to as “industrial participation” or “countertrade.”  These are provisions in arms contracts that promise specific benefits to the contracting country as a condition of that country purchasing defense articles or services from a nondomestic supplier. Offset contracts are a major means for defense companies to improve an arms contract proposal’s standing vis-à-vis other bidders, but they can also be a pathway for kickbacks and patronage, whereby senior officials can direct offsets to their own companies or to underlings in return for loyalty. Based on an analysis of 134 defense companies worldwide by Transparency International, 90 percent of surveyed companies exhibited “limited” to “very low” commitment to combating corruption in defense offset contracts.

Countries can require offset deals to be public and transparent, but a high degree of secrecy is more often the norm. Some countries, including the UAE, declare these contracts to be secret. Others, like the United States, provide only the bare minimum of information. Because so many of these offset deals are extremely complex, even when publicized, tracking the various flows of funds and potential conflicts of interest can be a challenge. 

The UAE wraps an additional layer of complexity and opacity around defense procurement arrangements by funneling much of the funds and contracts through Emirati sovereign wealth funds. The UAE is unique in that two of its major SWFs were initially established to funnel proceeds from defense offsets to Emirati companies and citizens, and they remain intimately tied to the Emirati defense industry.

Mubadala, founded in 2002 by the UAE Offsets Group, was created as a civilian adjunct to the overall defense offset program of the Emirate of Abu Dhabi’s military-procurement-focused, high-tech industrial development program. A series of mergers brought its assets to $284 billion in 2018, and it is now the third-largest SWF in the UAE and the thirteenth largest in the world.

Tawazun Council (commonly referred to as Tawazun) was established in 1992 as the Offset Program Bureau. Tawazun oversees the military component of various defense offset agreements. It boasts of creating numerous companies and investment vehicles, including the EDGE Group, which is now the UAE’s main state-owned defense industry conglomerate with more than twenty companies. In 2019, Tawazun’s associated SWF—Tawazun Holding—was absorbed into the Mubadala SWF, and a new $680 million SWF was created under Tawazun called the Defense and Security Development Fund (also called the Strategic Development Fund).

Defense offset funds for Persian Gulf countries are supposed to be used to increase employment opportunities for their nationals, attract new technologies and foreign investment, and reduce their economies’ reliance on oil and gas exports through diversification strategies. In reality, the defense offsets themselves have generally not created many actual jobs, especially compared to the large burden offsets place on state budgets. Moreover, because the purchasing countries front much of the cost of offsets through tax credits and other investment incentives, these programs can be an especially economically inefficient means of generating job growth and facilitating technology transfer.

In the UAE, the defense procurement that feeds into these offset contracts and their associated SWFs is especially susceptible to possible corruption risks. According to Transparency International’s Government Defence Integrity (GDI) Index, which assesses the comprehensiveness of anti-corruption measures in national defense institutions, the UAE is considered a “very high risk” country for defense sector corruption: procurement processes are opaque, underregulated, and lack public oversight. Based on research conducted in 2019, the GDI found no laws or regulations that address the UAE’s defense procurement process. Instead, acquisitions are guided by a secret strategy derived by a small team of Emirati officials and foreign consultants. The UAE has no official reporting mechanisms regarding defense acquisitions except for occasional disclosures to defense industry journalists and experts. While some basic internal auditing practices are in place, there are no external oversight bodies that can monitor the administration of the UAE’s defense purchases.

Moreover, while Mubadala has signed onto the IFSWF and its Santiago Principles and has received good overall ratings by the Peterson Institute’s SWF Scorecard, Tawazun’s SWF has not been rated by the Peterson Institute and is not a member of the IFSWF or a signatory to its Santiago Principles.

In addition to corruption concerns, there can be an especially troubling nexus with conflict and state fragility.  For example, the UAE’s Horizon Flight Training Academy was founded via defense offset contracts and is under the EDGE Group umbrella. The majority of its pilots go to the Emirati military, where they have flown in highly controversial military operations in Yemen. This arrangement points to how the funding of SWFs associated with the arms trade can also undermine other global security goals.

Three Parallel Paths to SWF Reform

The cases in this compilation highlight the need for substantial reform in global SWF governance.  For reform to be effective, it must follow along three simultaneous, parallel paths.

Policy Reform for Countries Where SWFs Invest and Private Sector Intermediaries Interact With SWFs

When used appropriately, SWFs can help diversify economies, save resources for future generations, help smooth potential swings in the budgets of natural-resource-based economies, and help address budget deficits, especially in hard times. The case studies in this compilation have documented, however, that there can be significant gaps in how SWFs are governed, in both the states that create the SWFs and the countries where SWFs are invested.

One significant problem is the lack of laws and regulations that mandate oversight of SWF investments. What oversight exists is almost exclusively focused on national security concerns in the countries where the investments occur, and little attention is paid to assessing and addressing corruption, money laundering, and other associated governance risks.

In the United States, for instance, federal laws do not specifically restrict SWF investments but rather look to scrutinize or restrict foreign investments that pose a national security risk. These laws operate in conjunction with sector-specific restrictions in areas like telecommunications, energy, and other specific laws that restrict foreign investment. But outside of these generalized restrictions, there appears to be no publicly available guidance on how to address or conduct anti–money laundering due diligence on SWFs.

Other countries, such as the United Kingdom, have partial, directed guidance on how to address anti–money laundering and counter threat finance (AML/CFT) risks in SWFs. To address SWF corruption, money laundering, and other associated governance risks, national governments and private sector actors must first recognize the enabling role they have in facilitating red flag behavior and then address the governance and regulatory gaps that allow this behavior.

The following policy recommendations could help address these gaps:

  • National governments should establish a regulatory rubric that examines SWFs for both national security risks and significant corruption and money laundering risks. This rubric would automatically make verifiable information on particularly high-risk SWFs more readily available.
  • Because SWFs often invest through private equity funds, hedge funds, and venture capital funds, jurisdictions should ensure that the private investment fund sector has requisite AML/CFT obligations such as full customer due diligence. And these obligations should be appropriately enforced.
  • Jurisdictions should prioritize the creation of strong beneficial ownership registries that require a business, trust, charity, or other entity to declare who actually owns or controls it. If the beneficial owner includes an SWF, this should have to be declared as part of the registry process. This act is critical for continued information sharing and to track the movement of ill-gotten gains of political elites, gains that can move more easily via these funds.
  • Financial institutions and entities obliged to implement AML/CFT frameworks should be provided detailed guidance on how to assess SWFs for AML/CFT and corruption risks. The “sovereign” nature of a fund should not provide automatic legitimacy to an SWF’s financial transactions. The language in the UK’s Joint Money Laundering Steering Group (JMLSG) offers a good starting point.
  • Jurisdictions should implement more stringent penalties, including the loss of a license and criminal prosecution, for individuals that enable corrupt activity. Despite record fines, financial institutions, law firms, accounting firms, and other intermediaries continue to engage in bad behavior, as laid out in numerous examples throughout this report.
  • Governing bodies for international sporting events should ensure that any SWFs involved are subject to the independent audit or disclosure requirements of contracts awarded, including full financial reporting to address associated corruption and money laundering risks.
  • Capital market regulators, such as the U.S. Securities and Exchange Commission, should create more detailed SWF investment forms that include the name and location of all sub-funds, co-investments, and direct and indirect investments.

Policy Reform in Countries Where SWFs Are Created

Fortunately, substantive work has already been done to identify the key reforms needed to ensure that states create robust accountability mechanisms. But the absence of global assessments or enforcement mechanisms, such as through civil society or investigative journalist mechanisms, has limited the broad-based uptake of these suggested reforms. Leading experts in the field have identified four internal reform efforts that are critical to addressing SWF-related governance, corruption, and money laundering challenges. Every SWF should:

  1. Establish a well-defined institutional structure for the SWF, including by setting clear fund objectives. For instance, plainly state whether the fund seeks to stabilize the budget, save for future generations, or dedicate its resources to development goals; disallow the use of vague, undefined terms that can make it hard to assess the SWF’s objectives.
  2. Set a rules-based investment mandate that spells out what percentage can be made in equities versus real estate versus development projects. Restricting domestic expenditure through the SWF and mandating that domestic investments follow a budgetary process are additional ways to mitigate fund losses and risks around patronage networks and crony capitalism.
  3. Develop and operationalize well-defined, rational fiscal rules. The rules would dictate when and how money could be withdrawn and deposited into the fund. For instance, Russia and Abu Dhabi do not have withdrawal and deposit rules. By contrast, Alaska and Texas in the United States, as well as Chile, Norway, and Timor-Leste, have clear rules on withdrawals and deposits and require disclosures on fund activities, transactions, and fund managers.
  4. Establish independent oversight of the fund. This would ensure that there is a clear division of responsibilities between the fund manager, who has overarching authority over the SWF, and those running the day-to-day operations; it would also help create a clear mapping of the ethical and conflict of interest considerations. Additionally, it would ensure that the fund provides an exhaustive disclosure of its investments, fund managers, and audited financial statements. Independent oversight authorities within the country should monitor fund behavior and raise queries about management and performance. Alberta in Canada, North Dakota and Texas in the United States, and Norway have funds with strong independent oversight mechanisms. SWFs must also be accountable politically to a parliament or congress, accountable legally to the judiciary, and accountable operationally to the auditor general or some other supervisory body that is both formal and independent. There should also be sufficient information available for civil society, journalists, and international organizations like the IMF so that they can also serve as effective oversight mechanisms.

Revisiting and Reframing International Standards on SWFs

Since their creation, the Santiago Principles have remained entirely voluntary and have not been reviewed or updated. The fact that they are voluntary helps make the case that SWFs are ill-equipped to address and enforce the governance challenges of SWFs and the security concerns of the countries where they invest.

While the Santiago Principles have long provided clear context for studying and regulating SWFs’ impact, nowhere in the drafting language is there explicit reference to the potential for abuse. Because the principles have remained static, they do not account for changes in how SWFs are used and operated.

Critics of the Santiago Principles also note that there is no explicit acknowledgment of the significant increase in “novel forms of partnership and collaboration” in “sovereign-private arrangements.”11Explicitly recognizing this increase and enhancing disclosure requirements of these arrangements would alleviate concerns around both national security and corruption risks.

Additionally, there is no requirement to publish audited statements or send them to an international organization that can act as an independent third-party verifier of information. Other international mechanisms such as the Extractive Industry Transparency Initiative—which sets best practices for oil, gas, and mining governance—include this requirement.

The IFSWF also lacks any legal authority to enforce its standards, and unlike with money laundering and tax evasion, international organizations and civil society have shied away from naming and shaming as a way of ensuring compliance.

Self-regulation is ineffective because it is simply not in the interest of the SWFs to critically examine their frameworks. Therefore, the overhaul of international standards must involve greater dialogue and guidance from both the OECD and IMF; SWF reform will not trickle down at the country level unless there are measurable international standards against which SWFs are compared.

The following policy recommendations may help address these gaps:

  • The Santiago Principles should be revised to reflect current SWF practices and risks. Any such revision effort should seek input from a wide variety of stakeholders and specifically include civil society organizations.
  • The Santiago Principles should be revised to serve as both guiding principles and effective standards against which international organizations like the IMF can conduct assessments. There is precedent for this: countries allow their AML/CFT standards to be assessed by the Financial Action Task Force (FATF) or its regional bodies, and the assessment is not perceived as impinging on states’ sovereignty.
  • The OECD should move its focus beyond the narrow prism of security threats to investment jurisdictions and publish a comprehensive international best practices paper that addresses both the internal and external aspects of SWF corruption risk.
  • SWFs that are at high risk for corruption and money laundering should be red flagged.12

The intention of this compilation is not to undermine the tremendous value that a well-governed SWF can provide for a country and its citizens for generations to come. Valuable lessons abound from the experience of countries that have successfully transitioned from natural-resource-dependent economies to economic diversification.  At the same time, this compilation and the reforms suggested serve to highlight the need for more critical study around the governance risks of SWFs. Failure to understand these risks will lead to SWFs failing to deliver on their promise of economic security and generational citizen wealth.

Note: Citations are used only for direct quotes in this summary; all material used in this summary is fully sourced throughout the compilation.

Notes

1 “U.S. Seeks to Recover $1 Billion in Largest Kleptocracy Case to Date,” press release, Federal Bureau of Investigation, accessed February 6, 2022, https://www.fbi.gov/news/stories/us-seeks-to-recover-1-billion-in-largest-kleptocracy-case-to-date.

2 “United States Seeks to Recover More Than $1 Billion Obtained From Corruption Involving Malaysian Sovereign Wealth Fund” (The United States Department of Justice, July 20, 2016), https://www.justice.gov/opa/pr/united-states-seeks-recover-more-1-billion-obtained-corruption-involving-malaysian-sovereign.

3 “United States Seeks to Recover More Than $1 Billion Obtained from Corruption Involving Malaysian Sovereign Wealth Fund.”

4 “Treasury Prohibits Transactions With Central Bank of Russia and Imposes Sanctions on Key Sources of Russia’s Wealth,” press release, U.S. Department of the Treasury, February 28, 2022, https://home.treasury.gov/news/press-releases/jy0612.

5 Mustafa Sonmez, “Under Financial Strains, Turkey Designs ‘Parallel Budget’,” Al-Monitor, November 10, 2016, https://www.al-monitor.com/originals/2016/11/turkey-financial-strains-designs-parallel-budget.html.

6 Wendy Wu, “China’s Financial Giants Hammered in Discipline Review,” South China Morning Post, February 5, 2016, https://www.scmp.com/news/china/policies-politics/article/1909938/chinas-financial-giants-hammered-corruption-review.

7 Anna Gelpern, Sebastian Horn, Scott Morris, Brad Parks, and Christoph Trebesch, “How China Lends: A Rare Look Into 100 Debt Contracts with Foreign Governments,” Peterson Institute for International Economics, May 2021, 5, https://www.piie.com/sites/default/files/documents/wp21-7.pdf.

8 Luca Ranieri, “The Malta Connection: A Corrupting Island in a ‘Corrupting Sea’?,” The European Review of Organized Crime 5, no. 1 (2019): 10–35; 1.

9 Ranieri, “The Malta Connection," 2.

10 Christopher Giles, “Malta’s ‘Golden Passports’: Why Do the Super-Rich Want Them?,” BBC News, December 4, 2019, https://www.bbc.com/news/world-europe-50633820.

11 Adam D. Dixon and Imogen T. Liu, “Santiago Principles 2.0: Advancing the Agenda,” International Forum of Sovereign Wealth Funds, https://archive.ifswfreview.org/2018/our-partners/santiago-principles-20-advancing-agenda.

12 However, this process should ensure that developing country SWFs are not unfairly targeted, as this has potential consequences for de-risking. There has been criticism around global listing processes. For more information, see “When Banks Leave: The Impacts of De-Risking on the Caribbean and Strategies for Ensuring Financial Access,” Statement of The Honorable Mia Amor Mottley, Prime Minister of Barbados, Minister of Finance, Economic Affairs and Investment and Minister of National Security and Civil Service at the Hearing of the United States Representatives Committee on Financial Services, September 14, 2022, https://democrats-financialservices.house.gov/uploadedfiles/hmtg-117-ba00-wstate-mottleym-20220914.pdf.

Chapter 1: Sovereign Wealth Funds and Ongoing Corruption, Illicit Finance, and Governance Risks

Sovereign wealth funds (SWFs) have existed for more than a century, typically as state-sponsored financial institutions that manage a country’s budgetary surplus, accrue profit, and protect a country’s wealth for future generations.1 Yet, for the economies in the Organisation for 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.2

The term SWF itself refers to money that is invested by a country in order to protect it from economic shocks or to save it for future generations. The institutions featured in this paper have been included and classified as SWFs if they are members of the International Forum of Sovereign Wealth Funds (IFSWF), if leading investor subscription services like the Sovereign Wealth Fund Institute have categorized them as SWFs, or if cases or investigations have referenced them as SWFs. Only vehicles owned by a country’s national government have been included.

Early SWFs were set up in countries whose economies were reliant on exporting natural resources like oil, phosphate, and copper (for example, Chile, Kiribati, Kuwait, and Norway). Governments wanted to create a mechanism by which excess revenues generated when commodity prices were high could act as a buffer when there was an economic downturn. SWF investments also helped smooth out budgets, as the prices of those exports could rise and fall on international markets. SWF funding sources have expanded to include any surplus from foreign reserves, budgets, a country’s central bank reserves, public-private partnerships, or citizenship-by-investment schemes.

In the 1990s, SWFs held merely $500 billion in assets,3 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.4 This exponential growth in SWF investments has seemingly ignored many potential systemic corruption and other governance challenges. As outlined in this chapter and those that follow, SWFs are often found in countries with high risks of corruption and significant governance challenges including poor rule of law. And because SWFs are usually completely under the control of governments, they can be used to pursue purely political goals. Moreover, SWFs often have no fiduciary responsibilities or minimal reporting obligations, making it difficult to understand where a country’s money is invested. Despite SWFs being publicly financed entities, they are not subject to rigorous international financial disclosure and accountability mechanisms that would check for issues such as corruption. There is also a substantial network of intermediaries (financial experts and professionals) that help SWFs invest, which, as this paper documents, can raise the risk of corruption and other governance challenges, if there is poor oversight and accountability. Basically, SWFs are only subject to voluntary self-regulation, and so far, as of 2021 twenty-nine SWFs—which account for roughly 80 percent of all SWF assets—are only in partial compliance with the self-assessment standards set out by IFSWF.5

Public consciousness of SWFs, their roles in economies, and their potential political impact grew during the 2007–2008 global financial crisis. Some SWFs played a “white knight” role to several Western financial institutions, providing large capital infusions to banks facing bankruptcy.6 In the first six months of 2008, SWFs injected more than $80 billion into Barclays, Merrill Lynch, Morgan Stanley, and UBS, stabilizing the global credit market.7 At the same time, however, these large investments drew much more public scrutiny to SWFs. Yet, most of the international, government, and academic discourse since then has centered around the impact of SWFs on corporate governance, financial market stability, and national security risks—with corruption risks rarely being discussed.

The potential for SWFs to be used for grand corruption and kleptocracy first gained widespread attention in the early 2010s due to a scandal involving a Malaysian SWF called 1Malaysia Development Berhad (1MDB), which is described in detail in chapter 3. Under former Malaysian prime minister Najib Razak and a financier named Jho Low, a series of con artists, bankers, Malaysian elites, and even Hollywood movie stars benefited from the diversion of more than $4 billion in funds from Malaysia’s 1MDB SWF.8 As media reports began to highlight troubling issues with the fund and as the U.S. Department of Justice launched an investigation, 1MDB found it difficult to use the international banking system. However, elites from Saudi Arabia and the United Arab Emirates came to the rescue, using their personal reputations and their own SWFs to help 1MDB continue to launder funds.

In the wake of that headline-grabbing corruption scandal, the question that remains unanswered is whether current research, government regulation, and international standards can adequately deal with the corruption and other governance risks that SWFs present. Using case studies of SWFs from Africa, Asia, Europe, and the Middle East, the chapters in this compilation demonstrate that enduring systemic governance issues and regulatory gaps have enabled SWFs to act as conduits of corruption, money laundering, and other illicit activities. For SWFs to achieve their full potential, reform is needed not only at the institutional level of the SWF but also across the variety of actors and jurisdictions that make up the supply chain of SWF activity.

This introductory chapter is intended to help set the scene for what is a complex topic. The chapter presents an overview of SWFs, the potential risks of corruption and rent-seeking activities, and the impact these behaviors can have on a country’s citizens. The chapter also demonstrates how SWFs have evolved, how they are funded, where and how they invest, and the current international and domestic regulatory landscape. Finally, it summarizes the different SWFs examined and the recommendations for helping them reach their potential.

What’s in a Name: Challenges With Defining a SWF

Any discussion of SWFs is incomplete without addressing an ever-present definitional conundrum. Though recognized SWFs like the Kuwait Investment Authority (KIA) have been around since the 1950s,9 the term “sovereign wealth fund” emerged only in 2005,10 when it was coined by financial analyst Andrew Rozanov as a way to differentiate SWFs from other institutional investors.11 Since then, however, international organizations, governments, and academics have all created and employed slightly different definitions of the term SWF.12 The lack of a clear, single definition makes monitoring SWFs for money laundering, corruption, and other rent-seeking especially challenging because there is no uniform way to provide guidance on potential risks and to identify what financial behavior should be monitored and assessed. The differences in SWF definitions have also prevented states from maximizing their combined efforts in countering illicit acts.

Perhaps the best-recognized definition is the one contained in the Generally Accepted Principles and Practices (GAPP) that govern SWFs, otherwise known as the Santiago Principles. Drafted by the International Working Group on SWFs, the Santiago Principles define SWFs as “special-purpose investment funds or arrangements that are owned by the general government.”13 Created for macroeconomic purposes, SWFs hold, manage, or administer assets to achieve financial objectives and employ a set of investment strategies that include investing in foreign financial assets. SWFs are commonly established out of balance-of-payments surpluses, official foreign currency operations, the proceeds of privatizations, fiscal surpluses, and/or receipts resulting from commodity exports.

The Santiago Principles are considered global foundational standards under which SWFs have committed themselves to operate. A key element of the SWF definition is that the fund must be owned by a national or subregional government. For example, a fund owned by the state of Alaska would qualify as an SWF because it was owned by a state government within the United States. The next criterion is that the vehicle’s investments must include foreign investments. Therefore, any fund with a mandate to invest all its money domestically would not be considered an SWF. By that measure, the Türkiye Wealth Fund (discussed in chapter 8 of this compilation) would not usually be considered a SWF, as it has a purely domestic mandate. But to ensure consistency across the cases presented here, entities treated as SWFs in practice, such as the Turkish fund, are also included. Appendix A provides a more detailed discussion of various SWF definitions.

The Growth and Evolution of SWFs

Charting the story of SWF growth provides important evidence for why so many SWFs appear to have serious corruption, money laundering, and other governance risks. Globally, prior to 2010, there were only fifty-eight SWFs.14 Today, however, SWFs have become an increasingly “fashionable” type of state-owned entity (see figure 1), and there are currently 118 operating or prospective SWFs.15 In the African continent alone, prior to 2000, there were only two SWFs. Since 2000, sixteen new SWFs have been set up (see figure 2). This increase in the number of SWFs has also meant a dramatic increase in the value of the assets that they own or control.

Figure 1: Growth of SWFs
Figure 2: SWF Establishment Years

This dramatic growth in SWFs is concerning because they 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. For example, in 1999, the State Oil Fund of the Republic of Azerbaijan was set up, and as of April 2023, it reportedly had $53.4 billion in AUM.16 Meanwhile, in 2022, Transparency International’s (TI) Corruption Perceptions Index (CPI) gave Azerbaijan a failing score of 23 out of 100, ranking the country 157 out of 180 countries; in 2021, the World Bank’s Rule of Law Index (ROLI) ranked the country 131 out of 192 countries.17 In another example, in 2002, Equatorial Guinea’s Fund for Future Generations was set up (see chapter 4), and now it reportedly has $165 million in AUM.18 Yet the CPI gave Equatorial Guinea a failing score of 17 out of 100, ranking the country 171 out of 180 countries; the ROLI ranked the country 175 out of 192 countries.19 Figures 3 and 4 demonstrate the CPI and ROLI index scores of African countries where SWFs have been established.20 With few exceptions, like Botswana and Namibia, the vast majority of countries on the continent that have or plan to set up SWFs have significant corruption risks and weak rule of law systems. Can SWFs that are meant to safeguard wealth for future generations successfully operate in a corruption-rich environment? The evidence that unfolds in the following chapters raises serious concerns about the state of play of existing governance norms and enforcement efforts. It also provides a compelling narrative on the need for clear policies related to the management of SWFs and lends weight to the recommendations included at the end of this compilation.

Figure 3: CPI Index Scores
Figure 4: Rule of Law Index

This dramatic growth in SWFs is also concerning because the sources of funding, objectives, mandates, investment portfolios, and the legal mechanisms through which SWFs have been set up vary significantly, making it more difficult to monitor and assess SWF behavior. Early SWFs could be broadly divided into three categories based on their unique objectives: (1) stabilization funds established to insulate a country’s economy from both internal and external shocks; (2) capital maximization funds established to transform natural resource revenues into longer-term wealth for future generations; and (3) strategic development funds established to help create jobs, improve infrastructure and development within the country, and ultimately help diversify the economy by moving it away from reliance on a particular sector or natural resource. Today, SWFs often have multiple objectives and mandates, and governments can alter the objectives based on changing priorities.

For instance, the KIA was set up in 1953 with the objective to invest Kuwait’s excess oil revenues and preserve the country’s oil wealth for future generations, and its mission has not changed.21 Similar to the KIA, the Revenue Equalization Reserve Fund of Kiribati was created in 1956 to act as a store of wealth for the country’s earnings from phosphate mining.22 Early funds of this type were conservative in their investment strategies, primarily focused on investing in a mix of money market instruments.23

However, later SWFs—such as Bpifrance, Singapore’s GIC, the Türkiye Wealth Fund, and the Maltese National Development and Social Fund—were set up as noncommodity funds financed through the respective country’s foreign reserves or as existing public equity interests or assets financed through the sale of state-owned assets (or in Malta’s case, through the sale of the country’s passports).24 As the sources of funding have changed, so have the investments, objectives, and mandates of the funds.

According to the case studies in this compilation, SWFs have been used to amass large art collections (see chapter 3); acquire global sports teams and sponsor international sporting events (chapter 4); fund the development of, and manage the profits from, a national COVID-19 vaccine program (chapter 7); and route payments for defense contracts (chapter 11). All these investments are supposed to further the SWF’s stated goals of capital maximization, macroeconomic stability, or economic development. However, in reality, they are commonly linked to an array of potentially unlawful activities. And as each of the case studies in this compilation highlight, one need not probe far to reveal a pattern of troubling behavior. But, as this compilation will also lay out, domestic and international standards lack the language necessary to identify risks that lead to this behavior. Additionally, the discussion around SWF risks is seemingly divorced from the wider discourse on anti-corruption, anti–money laundering, and other norms associated with other types of state-owned entities.

Figure 5 illustrates that SWFs exist across a range of categories. Coupled with the aforementioned definitional issue, these variations in type make identifying atypical SWF behavior or SWFs at risk for corruption and money laundering all the more challenging.

Figure 5: Development of SWFs

In addition to the aforementioned factors, how an SWF’s objectives are fulfilled can contribute to governance and illicit finance risks. The mechanics of these investments and the network of actors and jurisdictions that facilitate these investments provide additional context on why corruption and broader governance risks of SWFs are allowed to thrive. As complex investment vehicles, SWFs and their investment strategies can be mapped in myriad ways; however, because the intention of this compilation is to address the corruption and money laundering pathways of SWFs, this paper will focus on answering three questions: How do SWFs invest? Who helps SWFs invest? And where do SWFs invest?

How Do SWFs Invest?

The purpose and objective of a fund determine how its investments are directed. For instance, capital maximization funds like the KIA—which tend to be the most “risk-seeking”—invest in hedge funds, real estate, private equity, and infrastructure (known collectively as “alternatives”) and other so-called yield-generating assets to meet their objectives. These assets aim to bring an investor short-to-medium-term returns by paying out dividends, providing an interest, or generating similar financial income. 

Stabilization funds like the Mexico Oil Revenues Stabilization Fund have short investment time horizons and tend to be very liquid. As a result, they are looking for investment opportunities, such as bonds, treasury bills, and guaranteed investment certificates, otherwise known as long-term fixed income securities.25 Finally, sitting in the middle, economic development funds like Mubadala in the United Arab Emirates (UAE) invest in alternatives and other safer assets—such as short-term fixed income securities—to ensure a stable stream of lower-risk financing and to provide the SWF with consistent returns (see figure 5).26

These neat demarcations are useful in categorizing the overall mode of operations of SWFs, but they do not reflect all the ways in which a country uses an SWF or how the SWF’s priorities can shift over time.27 Stabilization funds, which tend to be the most risk averse, invest their money in cash, shares listed on a stock exchange, or investments that will provide a fixed income to the SWF through the life cycle of the investment.

For instance, the Malaysian 1MDB fund was set up as an economic development fund, and its investments were apparently intended to further the country’s development goals. But as chapter 3 discusses, these investments were merely a front to divert $4.5 billion with the assistance of numerous individuals, including government officials from Malaysia, Saudi Arabia, and the UAE. The investment mechanism was seemingly legitimate—involving financial institutions with world-class reputations, such as Goldman Sachs—but, in reality, it was laundering stolen money to fund the individuals’ lavish lifestyles.

Saudi Arabia’s Public Investment Fund (PIF) has a similar global footprint and now supposedly has about $700 billion in AUM (see chapter 6 and figure 6).28 However, officials within the PIF have reportedly voiced concerns about the riskiness of PIF’s $2 billion investment into Affinity Partners, a private equity fund owned and operated by Jared Kushner.29 Investments like this and the recent pact between Saudi Arabia’s LIV golf tournament with the Professional Golf Association (PGA) Tour blur the line between pursuing economic development and purchasing economic or political influence, thus making assessments around corruption and other governance risks more challenging.

Figure 6: Saudi Arabia's PIF

The way these SWF investments are carried out presents another difficulty in tracking them. SWF investment methods broadly fall into three types:

  1. Indirect SWF investment (the most traditional method), in which the SWF provides capital to another investment fund and allows that fund to manage the SWF’s money.30 This method accounted for the bulk of SWF activity in 2020 and 33 percent of all SWF allocations.31
  2. Direct SWF investment, such as the Qatar Investment Authority’s (QIA) purchase of the French soccer club Paris Saint-Germain in 2011–2012.32
  3. SWF and partner co-investment, such as the complicated 2016 deal between QIA and the commodity trading firm Glencore to invest in Russian oil giant Rosneft.33

Each investment method has an impact on profitability and its own corruption, money laundering, and governance risks. On the face of it, direct SWF investment may appear the easiest to track and therefore the easiest for public oversight and for authorities to check for money laundering or corruption risks. However, financial institutions and government agencies still need to explicitly evaluate and differentiate these risks based on the SWF’s location and the governance and transparency levels within the fund. With much of the discourse focused on the national security risks of SWFs, there appears to be little scrutiny of a variety of other types of risks. For instance, a lawsuit filed in Massachusetts alleges that $3.5 billion was stolen from the Saudi PIF and some of it was used to purchase eight condos in Boston.34 Yet prior to the lawsuit filed by the Saudi government, the transaction did not raise any red flags from financial institutions within the United States.

Still, indirect SWF investment may be more challenging to track and monitor. SWFs can often invest in a private equity fund and then use the private equity fund to make further purchases. This obscures the SWF’s identity and creates corruption, money laundering, and national security risks. For instance, a 2018 report from the U.S. Department of Defense stated that through such investment strategies, the Chinese government has been able to gain access to numerous cutting-edge, sensitive technologies from U.S. companies, which the department called “the crown jewels of U.S. innovation.”35 Similarly, another report from leading anti-corruption and financial transparency advocacy groups highlighted how municipal governments in China funded numerous Chinese venture capital firms that were then able to invest in sensitive U.S. technology sectors without drawing attention to their government connections.36

Finally, SWF and partner co-investment may present even more of a challenge. The deal in 2016 between the QIA and Glencore helped the two institutions together secure a 19.5 percent stake in Russian oil giant Rosneft for $11.3 billion.37 This investment was designed to give Russia a much-needed cash infusion in response to U.S. and European sanctions on Russia following its 2014 invasion of Crimea, which left the Russian economy and national budget struggling.38 The deal explicitly allowed Rosneft to repurchase the shares and allowed Glencore to purchase 220,000 barrels of oil a day from Rosneft; furthermore, the deal was primarily financed through Russian banks due to the ongoing U.S. and European sanctions.39 In 2017, Glencore and Rosneft sold 14.16 percent of the shares to China’s CEFC energy conglomerate. At the time, the Jamestown Foundation, a leading defense policy think tank, posited that this complex structuring would give China the opportunity to extend its influence over Rosneft, obtain a reliable oil supply that could not be “interdicted by foreign maritime powers,” and strengthen the credibility of the Belt and Road Initiative (BRI).40

The foundation also argued that the deal would give China “a functional (and opaque) way to essentially ‘bribe’ high-level Russian officials with cash that Moscow desperately needs.” Regarding Russia, it further stated that the deal would allow Rosneft, which has close to ties to Putin, to create “shady privatization schemes and what essentially amounts to a sophisticated version of money laundering via VTB.”41 Additionally, it said that the deal would allow Russia and President Vladimir Putin to create close relationships with “opaque business entities that enjoy state support in the Gulf and China.”

Who Helps SWFs Invest?

SWFs require an army of people to help guide and inform their investment strategies. For example, Norway’s Government Pension Fund–Global, one of the world’s largest SWFs, has a direct staff of more than 500 people from thirty-five countries and operates out of offices in Oslo, London, New York, Singapore, and Shanghai.42 Other smaller or less experienced SWFs may appoint an external investment manager. The chain of actors that help SWFs make investment decisions include the staff of the SWF, financial institutions, various private equity funds, consultants that provide expertise on sector-specific investments, external fund managers, and various other intermediaries vying for a lucrative piece of the SWF pie.

Many worrying patterns of behavior that repeatedly emerge when examining instances of SWF malfeasance and corruption come from weak governance norms that surround these external relationships, such as when private sector entities are either looking to gain the SWF as a client or are responsible for managing the SWF’s investment portfolio. In reading this compilation, the problematic nature of these relationships quickly becomes evident. In the case of the Angolan SWF (see chapter 4), the fund’s asset manager, Jean-Claude Bastos de Morais, advised the SWF to invest in at least four different opportunities where Bastos himself held an interest.43 In another case, the French bank Société Générale agreed to a settlement of 963 million euros ($1.05 billion) with the Libyan Investment Authority (LIA) for allegedly bribing Libyan officials for the chance to manage the LIA’s investments.44

The case studies in this compilation demonstrate that a troubling relationship can exist between corrupt political regimes and private sector institutions that seek to maximize profit or personal gain but may give little consideration to what happens to citizens if the SWF’s resources are lost. However, all of this is not to suggest that external advisers should be disallowed; rather, stronger governance rules both within SWFs and private sector entities are necessary for SWFs to actually benefit from robust, external financial sector expertise.

Where Do They Invest?

The illicit finance and governance risks within SWFs do not exist in a silo. Almost always, SWFs invest outside their home country. Therefore, understanding where SWFs invest can be valuable in determining how best to address potential governance risks, including risks of corruption and money laundering. A 2021 analysis of a sample of SWF investment patterns found that in 2020–2021, the United States, India, China, the United Kingdom, Singapore, Russia, and Brazil collectively represented the destination for 73 percent of all direct investments. The United States accounted for the largest direct SWF investment at 28.8 percent, followed by India at 14.7 percent and China at 10.5 percent.45

This pattern of investment, however, is only true of direct SWF investments. When including indirect investments, the amount invested in the United States, while significant, is not as large as the investment in the geographic region where the SWF is based. For instance, SWFs based in North America make 72 percent of their investments there, while SWFs in Asia make 50 percent of their investments in Asia and only 14 percent of their investments in North America (see figure 7).

These patterns of investment mean that countries serious about preventing their economies from being used as a conduit or safe haven for the proceeds of corruption and money laundering are in a prime position to scrutinize SWF investments for such risks.

Yet the case studies in this compilation show that despite the corruption, money laundering, and other governance risks associated with this significant pool of capital, SWFs or the legal structures through which SWFs invest appear to face minimal oversight when traversing the international financial system. For instance, as described in chapter 9, there appears to be little scrutiny of the Maltese SWF’s equity and bond investments in the United States as well as in emerging markets, even though that SWF is funded primarily through a controversial citizenship-by-investment program. Likewise, the 1MDB fund discussed in chapter 3 was able to invest in real estate, art, and movies in the United States with minimal scrutiny.

Figure 7: Geographic Focus of SWFs

Sovereign Wealth Fund Regulation

Understanding the nature of existing international standards applicable to SWFs provides much-needed context on how corruption, illicit finance, and other governance risks within SWFs have emerged. The International Working Group of SWFs established the Santiago Principles in 2008 as a result of the tension between maintaining open investment policies in developed economies and protecting against the national security risks that SWF investments bring. The goal was to ensure the “domestic and international legitimacy” of SWFs.46 Today, the group’s successor, the International Forum of SWFs (IFSWF), champions the principles that specifically require SWFs to be transparent, accountable, independent, and commercially oriented.47 While laudable, the principles are not binding and only serve as guiding norms for SWF governance. Moreover, they do not acknowledge that many SWFs operate in environments with high corruption risks and weak rule of law, and they therefore fail to provide any guidance on how best to operate an SWF in such environments.48

The OECD has also provided several guidance documents on SWFs.49 However, to date, all of the documents have been designed to help countries where SWFs invest their funds address the national security concerns that first brought SWFs to prominence.50 These documents and those written by other international organizations such as the World Bank conspicuously shy away from using the term “corruption” in matters relating to SWFs. This is in sharp contrast to their guidance documents on state-owned enterprises—which explicitly address the issue of corruption.51

This fixation with national security has trickled down into domestic legislation. Across both the United States and Europe, numerous laws limit or scrutinize SWF investments for potential national or economic security risks but not for corruption and money laundering risks. A 2009 report from the U.S. Government Accountability Office laid out the various national security restrictions in place across sectors, including transportation, technology, communications, national security, and energy (including nuclear energy). However, neither the report nor any subsequent public U.S. government agency report has dealt with the danger that SWFs could use the United States as a money laundering conduit or a destination for corrupt funds.52

In the absence of binding international standards, greater transparency through public information disclosure would help ensure accountability and reduce the risks of corruption and other types of illicit finance. This is a model particularly favored by the extractives sector to reduce corruption and associated money laundering risks. In many countries, foreign aid and investment into the extractives sector is contingent on meeting standards set forth by the Extractives Industries Transparency Initiative, the Open Contracting Partnership, and other similar efforts.53 However, SWFs have thus far largely succeeded in keeping their operations and investments shrouded in secrecy. Exceptions like Norway’s Government Pension Fund, which has robust transparency and disclosure practices, have not shifted the overall SWF culture toward transparency. Gaps in transparency and data limit the ability of researchers and governments to better capture and track corruption and money laundering in SWFs (see chapters 2 and 12).

Finally, in the absence of clear regulations, industries often set up self-regulatory bodies to ensure standards and good governance. The IFSWF is the closest organization that exists to fulfilling that role for sovereign wealth funds. The organization was incorporated in 2014 to strengthen the SWF “community through dialogue, research and self-assessment.”54 The IFSWF model permits members to self-assess the robustness of their governance standards. Needless to say, this has not created the necessary incentives for SWFs to critically examine their operations. Several funds mentioned in this report are IFSWF members and have given themselves strong self-assessment scores despite the publication of news stories that raise legitimate concerns about the operations of these funds. An analysis of IFSWF members’ and associate members’ CPI scores reveals that a significant number of SWFs operate in corruption-rich environments (see figure 8). It thus remains an open question whether IFSWF membership provides some of these funds, whose behavior may raise red flags, a reputational benefit and added credibility.

Figure 8: CPI IFSWF

Compilation Overview

Against this backdrop, the eleven chapters in this compilation examine specific cases that demonstrate SWFs’ susceptibility to corruption, money laundering, and other governance issues and the enabling environment that stymies efforts at detection and public oversight.

Chapter 2 further describes the potential corruption risks associated with SWFs, including how the current voluntary standards fall short. It also documents how the lack of free, publicly available data on SWFs prevents oversight and accountability by governments, civil society, and the media. It notes that the opacity of SWFs can lead to fears that funds are being used for political goals or being co-opted, rather than being used for their stated purpose.

Chapter 3 describes one of the most famous and egregious examples of corruption associated with SWFs: the so-called 1MDB scandal. 1MDB was a sovereign development fund intended to improve the infrastructure and investment environment of Malaysia. Instead, $4.5 billion was siphoned off by senior Malaysian elites, politically connected individuals, and bankers to purchase everything from yachts to art to real estate. This case thus provides a model for how SWF-associated corruption and money laundering schemes can work and how their financial complexity can enable corruption and other malfeasance to continue for years largely undetected.

As noted in this introduction chapter, states have traditionally used SWFs to diversify the proceeds from natural resources and ensure that the proceeds can be saved for future generations. Chapters 4 and 5 highlight potential governance risks associated with natural-resource-based funds. In the case of Angola in chapter 4, a highly autocratic regime used its control over the government to divert oil funds to relatives and friends of the president, even though at the time it was ranked as having relatively good SWF governance by various indices. The Angola case also highlights how reforms can create cleaner and more resilient SWFs. 

The case of Equatorial Guinea in chapter 5 then describes how an extreme lack of available information about SWF activity increases the risks that money will be illegally diverted. The well-documented grand corruption associated with the country and the fact that the oil—upon which the country’s export revenue depends—is due to begin to run out within a decade heighten the need for the highest levels of transparency and good governance of the SWF to be instituted in a most timely manner.

Chapter 6 further describes Saudi Arabia’s PIF, one of the world’s largest SWFs. The PIF, and especially its associated Vision 2030 fund, has been used to acquire world-famous sports teams and even establish an entirely new golf franchise through its pact with the PGA, giving Saudi Arabia significant control over the elite-level tournaments associated with an entire sport. Such investments provide a means for authoritarian leaders such as Saudi Crown Prince Mohammed bin Salman to launder their reputations through sports using the proceeds of their country’s natural resources.

Even SWF funds disbursed to help in an emergency like the coronavirus pandemic are not immune from allegations of diversion and corruption. Chapter 7 describes how Russia’s leadership gave the funding for and marketing of Russia’s Sputnik V COVID-19 vaccines to the Russian Direct Investment Fund (RDIF), an unusual form of SWF. The chapter describes how the RDIF forced some countries to purchase Sputnik V vaccines through a series of shell companies that eventually raised the price to double what it should have been.55

SWFs are usually established to invest and diversify a country’s natural resource wealth, but some countries establish their SWF via loans or taxpayer funds from the state budget instead. This means that such funds can become a parallel budget that is out of reach of oversight by parliaments and citizens, as illustrated by the case of Türkiye’s SWF in chapter 8.

Scholars and policymakers have long worried that China’s BRI is a mechanism for opaque deals designed to help China further its global ambitions, especially through so-called debt-trap diplomacy. Chapter 9 describes how Chinese SWFs undergird the BRI, providing funds to help enable the BRI’s overseas investments.

One of the more unusual means of funding a state’s SWF is covered in chapter 10 and features Malta’s SWF. The country uses the proceeds from the sale of Maltese visas and citizenship—so-called golden visas and golden passports—to fund its SWF. Numerous investigations by the European Union (EU) and investigative journalists have documented that this has enabled some corrupt and criminal actors to receive EU residency and/or citizenship and the benefits that go with it. Such funding can create a conflict of interest for Malta because tightening its residency and citizenship requirements could undermine its SWF. 

A few countries use the international arms trade to help fund their SWFs, most notably the UAE. One of its most famous SWFs, Mubadala, was founded with money from side contracts for arms purchases from Western defense firms. The arms sector is notoriously fraught with corruption, and the extreme opacity of defense procurement contracts carried out through the veil of sovereign wealth funds makes accountability even more difficult. Because these SWFs are associated with the arms trade, their activities can also have larger ramifications for peace and security, as chapter 11 describes.

Finally, chapter 12 looks at what concrete measures are needed to address the systemic challenges in identifying and responding to corruption, illicit finance, and associated governance risks associated with SWFs. The chapter examines in greater detail the ongoing accountability mechanisms designed to improve SWF governance in their countries of origin, the current legal framework in investment destinations, and what more can be done to make these legal environments meaningful and robust. It also documents what greater transparency among SWFs could mean for both internal and external accountability and, finally, explores whether SWFs should be subject to international evaluations on anti–money laundering, similar to how many other aspects of the financial system are.

Notes

1 Udaibir S. Das, Adnan Mazarei, and Han van der Hoorn (eds.), “Economics of Sovereign Wealth Funds: Issues for Policymakers,” International Monetary Fund, 2010, https://www.imf.org/external/pubs/nft/books/2010/swfext.pdf.

2 The concern was that SWFs were becoming security threats by looking to advance their home country’s political goals rather than seeking to maximize their profits. See inter alia Mark A. Clodfelter and Francesca M. S. Guerrero, "National Security and Foreign Government Ownership Restrictions on Foreign Investment: Predictability for Investors at the National Level,” in Sovereign Investment: Concerns and Policy Reactions, eds. Karl P. Sauvant, Lisa E. Sachs, and Wouter P.F. Schmit Jongbloed (New York: Oxford University Press, 2012); Alan P. Larson, David N. Fagan, Alexander A. Berengaut, and Mark E. Plotkin, “Lessons From CFIUS for National Security Reviews of Foreign Investment,” in Sovereign Investment: Concerns and Policy Reactions, eds. Karl P. Sauvant, Lisa E. Sachs, and Wouter P.F. Schmit Jongbloed (Oxford: Oxford University Press, 2012); Fabio Bassan, The Law of Sovereign Wealth Funds (Cheltenham, UK, and Northampton, MA: Edward Elgar Publishing, 2011); and Angela Cummine, Citizens' Wealth: Why (and How) Sovereign Wealth Funds Should Be Managed by the People for the People (New Haven, CT: Yale University Press, 2016), 3–5. Interestingly, earlier incidences where national security concerns were raised often resulted from state-owned enterprise investments rather than SWF investments (for example, the Dubai Ports controversy).

3 Simon Johnson, “The Rise of Sovereign Wealth Funds,” International Monetary Fund, September 2007, https://www.imf.org/external/pubs/ft/fandd/2007/09/pdf/straight.pdf.

4 “Sovereign Wealth Funds in Motion,” Preqin, May 26, 2021, 9, https://www.preqin.com/insights/research/reports/sovereign-wealth-funds-in-motion; and Claire Milhench, “Global Sovereign Fund Assets Jump to $7.45 Trillion: Preqin,” Reuters, April 12, 2018,

https://www.reuters.com/article/us-global-swf-assets/global-sovereign-fund-assets-jump-to-7-45-trillion-preqin-idUSKBN1HJ2DG.

5 Prequin and IFSWF self-assesment reports accessed by the author.

6 “Sovereign Wealth Funds: Publically Available Data on Sizes and Investments for Some Funds Are Limited,” United States Government Accountability Office, October 6, 2008, 44, https://www.gao.gov/products/gao-08-946. It notes that “[i]n 2007 and early 2008, SWFs, in conjunction with other investors, supplied almost $43 billion of capital to major financial firms in the United States. Citigroup was the major recipient of capital, receiving $20 billion in late 2007 and early 2008. The other recipients were Merrill Lynch, Morgan Stanley, the Blackstone Group, and the Carlyle Group.”

7 Thomas A. Hemphill, “Sovereign Wealth Funds: National Security Risks in a Global Free Trade Environment,” Thunderbird International Business Review 51, no. 6 (2009): 551–566, https://deepblue.lib.umich.edu/bitstream/handle/2027.42/64327/20299_ftp.pdf?sequence=1.

8 “Explainer: Malaysia's Ex-PM Najib and the Multi-billion Dollar 1MDB Scandal,” Reuters, August 23, 2022, https://www.reuters.com/world/asia-pacific/malaysias-ex-pm-najib-multi-billion-dollar-1mdb-scandal-2022-08-23.

9 Long before the KIA was established, individual U.S. states had set up precursors to today’s SWFs. Texas set up the Texas Permanent School Fund in 1854; see Texas Education Agency, “Texas Permanent School Fund,” https://tea.texas.gov/Finance_and_Grants/Texas_Permanent_School_Fund.

10 Andrew Rozanov, “Who Holds the Wealth of Nations?,” Central Banking Journal 15, no.4 (2005): 52–57.

11 Rozanov, “Who Holds the Wealth of Nations?”

12 Cummine, Citizens' Wealth, 39–43; and see Appendix 1 for a discussion on the lack of a standard definition of the term “SWF.”

13 “Sovereign Wealth Funds: Generally Accepted Principles and Practices—‘Santiago Principles’,” International Working Group of SWFs, October 2008, 3, https://www.ifswf.org/sites/default/files/santiagoprinciples_0_0.pdf.

14 “Sovereign Wealth Funds in 2021: Changes and Challenges Accelerated by the Covid-19 Pandemic,” IE University Center for the Governance of Change, 2021, 26–27, https://docs.ie.edu/cgc/SWF%202021%20IE%20SWR%20CGC%20-%20ICEX-Invest%20in%20Spain.pdf.

15 “Sovereign Wealth Funds in 2021,” IE University Center for the Governance of Change.

16 “State Oil Fund of the Republic of Azerbaijan,” https://www.oilfund.az/en/report-and-statistics/recent-figures.

17 “Our Work in Azerbaijan,” Transparency International, https://www.transparency.org/en/countries/azerbaijan; and “Rule of Law—Country Rankings,” The Global Economy.com, https://www.theglobaleconomy.com/rankings/wb_ruleoflaw.

18 "Fund for Future Generations: Sovereign Wealth Fund in Equatorial Guinea, Africa,” Sovereign Wealth Fund Institute, https://www.swfinstitute.org/profile/598cdaa50124e9fd2d05b002.

19 “Our Work in Equatorial Guinea,” Transparency International, https://www.transparency.org/en/countries/equatorial-guinea; and “Rule of Law—Country Rankings,” The Global Economy.com.

20 Countries with lower rankings have stronger rule-of-law environments.

21 Carson Ezell, “Middle Eastern SWFs,” Harvard College Economics Review, October 23, 2021, https://www.economicsreview.org/post/middle-eastern-swfs.

22 “Investor Profile: RERF (Kiribati),” SWF Academy, https://globalswf.com/fund/RERF.

23 “Sovereign Investors 2020: A Growing Force,” PwC, 2020, 5, https://www.pwc.com/gx/en/sovereign-wealth-investment-funds/publications/assets/sovereign-investors-2020.pdf.

24 “Frequently Asked Questions,” GIC, https://www.gic.com.sg/who-we-are/faqs; and “Santiago Principles Self-Assessment,” IFWSF, https://www.ifswf.org/assessment/bpi-france

25 “Oil Revenues Stabilization Fund of Mexico: Overview,” PitchBook, https://pitchbook.com/profiles/limited-partner/52308-28.

26 “Mubadala Capital,” https://www.mubadala.com/en/what-we-do/mubadala-capital; and “Real Estate & Infrastructure Investments,” https://www.mubadala.com/en/what-we-do/real-estate-infrastructure-investments.

27 “Sovereign Investors 2020: A Growing Force,” PwC, 2020, 11, https://www.pwc.com/gx/en/sovereign-wealth-investment-funds/publications/assets/sovereign-investors-2020.pdf.

28 “About PIF,” https://www.pif.gov.sa:443/en/Pages/AboutPIF.aspx.

29 David D. Kirkpatrick and Kate Kelly, “Before Giving Billions to Jared Kushner, Saudi Investment Fund Had Big Doubts,” New York Times, April 10, 2022, https://www.nytimes.com/2022/04/10/us/jared-kushner-saudi-investment-fund.html?referringSource=articleShare.

30 “Sovereign Wealth Funds Turning to Private Capital: Are They Competing or Playing alongside GPs?,” IQEQ, June 30, 2021, https://iqeq.com/insights/sovereign-wealth-funds-turning-private-capital-are-they-competing-or-playing-alongside-gps.

31 “Sovereign Wealth Funds in Motion,” Preqin, 11.

32 “Qataris Buy Remaining 30 Pct of Paris St Germain,” Reuters, March 6, 2012, https://www.reuters.com/article/france-psg-qatar/qataris-buy-remaining-30-pct-of-paris-st-germain-idUSL5E8E69CP20120306; and “Sovereign Wealth Funds Triple Their Investments to 450 in 2021, According to IE University and ICEX-Invest in Spain Report,” IE University, March 9, 2022, https://www.ie.edu/university/news-events/news/sovereign-wealth-funds-triple-their-investments-to-450-in-2021-according-to-ie-university-and-icex-invest-in-spain-report.

Direct investment strategies benefit SWFs by giving them greater control over their assets and allowing them to bypass additional fee structures when investing through a private equity fund.

33 In co-investing, an SWF invests alongside a partner such as another SWF, private equity fund, or venture capital fund pension fund. Co-investing helps the SWF reduce its risk exposure, while allowing for more flexibility in portfolio construction. Neil Buckley, “Glencore-QIA Deal for Rosneft Stake Starts to Lose Its Lustre,” Financial Times, January 18, 2017, https://www.ft.com/content/c735dc00-dccf-11e6-86ac-f253db7791c6.

34 Tim Logan, “How Eight Fancy Boston Condos Figure Into a Fight Over the Saudi Throne,” Boston Globe, March 30, 2021, https://www.bostonglobe.com/2021/03/30/business/how-eight-fancy-boston-condos-figure-into-fight-over-saudi-throne.

35 Cory Bennett, “How China Acquires ‘the Crown Jewels’ of U.S. Technology," Politico, May 22, 2018, https://www.politico.com/story/2018/05/22/china-us-tech-companies-cfius-572413; and Erica Hanichak, Lakshmi Kumar, and Gary Kalman, “Private Investments, Public Harm: How the Opacity of the Massive U.S. Private Investment Industry Fuels Corruption and Threatens National Security,” Transparency International, December 2021, 23, https://secureservercdn.net/166.62.106.54/34n.8bd.myftpupload.com/wp-content/uploads/2021/12/Private-Investments-Public-Harm-How-the-Massive-and-Opaque-US-Private-Equity-Industry-Fuels-Corruption-and-Threatens-National-Security.pdf?time=1664249759.

36 Hanichak, Kumar, and Kalman, “Private Investments, Public Harm,” 23.

37 Jack Farchy and Neil Hume, “Glencore and Qatar Take 19.5% Stake in Rosneft,” Financial Times, December 10, 2016, https://www.ft.com/content/d3923b08-bf09-11e6-9bca-2b93a6856354.

38 One particularly interesting facet of the deal was that “Glencore’s actual equity stake in Rosneft was only about 0.5% and Qatar’s just under 5%.” See Farchy and Hume, “Glencore and Qatar Take 19.5% Stake in Rosneft.”.

39 Scott Patterson and James Marson, “Glencore, Qatar Sell Rosneft Stake to Chinese Firm in $9 Billion Deal,” Wall Street Journal, September 8, 2017, https://www.wsj.com/articles/glencore-qatar-sell-14-stake-in-rosneft-to-chinese-energy-company-1504881233.

40 Stephen Blank, “Kremlin Ties Rosneft Closer to China,” Jamestown Foundation, November 8, 2017, https://jamestown.org/program/kremlin-ties-rosneft-closer-to-china.

41 Vneshtorgbank (VTB) is one of Russia’s largest state-owned banks. It is subject to a variety of sanctions, including full blocking sanctions by the U.S. Treasury Department in response to Russia’s 2022 invasion of Ukraine. See “U.S. Treasury Announces Unprecedented & Expansive Sanctions Against Russia, Imposing Swift and Severe Economic Costs,” U.S. Department of the Treasury, February 24, 2022, https://home.treasury.gov/news/press-releases/jy0608.

42 “About Us,” Norges Bank Investment Management, accessed June 28, 2023, https://www.nbim.no/en/organisation/about-us.

43 David Pegg, “Angola Sovereign Wealth Fund’s Manager Used Its Cash for His Own Projects,” Guardian, November 7, 2017, https://www.theguardian.com/world/2017/nov/07/angola-sovereign-wealth-fund-jean-claude-bastos-de-morais-paradise-papers.

44 Michael Stothard and Jane Croft, “SocGen Agrees €963m Settlement With Libyan Investment Authority,” Financial Times, May 4, 2017, https://www.ft.com/content/7dc88450-3094-11e7-9555-23ef563ecf9a.

45 “Sovereign Wealth Funds 2021,” IE University Center for the Governance of Change, 24–25.

46 “IFSWF Members’ Experiences in the Application of the Santiago Principles,” Report Prepared by IFSWF Sub-Committee 1 and the Secretariat in Collaboration With the Members of the IFSWF, IFSWF, July 7, 2011, 40, https://www.ifswf.org/sites/default/files/Publications/stp070711_0.pdf.

47 “Santiago Principles,” International Forum of Sovereign Wealth Funds.

48 “OECD Guidance on Sovereign Wealth Funds,” Organisation of Economic Co-operation and Development (OECD), accessed July 29, 2019, https://www.oecd.org/daf/inv/investment-policy/oecdguidanceonsovereignwealthfunds.htm.

49 “OECD Guidance on Sovereign Wealth Funds,” OECD.

50 “OECD Guidance on Sovereign Wealth Funds,” OECD.

51 “State-Owned Enterprises and Corruption: What Are the Risks and What Can Be Done?,” OECD, August 27, 2018, http://www.oecd.org/fr/corruption/state-owned-enterprises-and-corruption-9789264303058-en.htm; “Anti-Corruption and Integrity in State-Owned Enterprises,” OECD, https://www.oecd.org/corruption/anti-corruption-integrity-guidelines-for-soes.htm; and Rajni Bajpai and Bernard C. Myyers, “Chapter 3: State-Owned Enterprises,” in “Enhancing Government Effectiveness and Transparency: The Fight Against Corruption,” World Bank, September 2020, 94–121, https://documents.worldbank.org/en/publication/documents-reports/documentdetail/235541600116631094/enhancing-government-effectiveness-and-transparency-the-fight-against-corruption?cid=gov_tt_gov_en_ext.

52 “Sovereign Wealth Funds,” United States Government Accountability Office; and “Assessing the Economic and National Security Implications of Sovereign Wealth Funds and Foreign Acquisition,” Committee on Banking, Housing, and Urban Affairs, U.S. Senate Hearing, November 14, 2007, https://www.govinfo.gov/content/pkg/CHRG-110shrg50364/html/CHRG-110shrg50364.htm.

53 “Extractive Industries Transparency Initiative,” EITI, https://eiti.org; and “Open Contracting Partnership,” Open Contracting Partnership, https://www.open-contracting.org.

54 “About Us," International Forum of Sovereign Wealth Funds, https://www.ifswf.org/about-us.

55 Pjotr Sauer, Jake Cordell, and Felix Light, “A Royal Mark Up: How an Emirati Sheikh Resells Millions of Russian Vaccines to the Developing World,” Moscow Times, July 10, 2021, https://www.themoscowtimes.com/2021/07/09/a-royal-mark-up-how-an-emirati-sheikh-resells-millions-of-russian-vaccines-to-the-developing-world-a74461; and Rolf J. Wideroe and Markus Tobiassen, “Sputnik for Sale,” VG Nett, June 3, 2021, https://www.vg.no/spesial/2021/sputnik/index-en.html.

Chapter 2: Corruption Risks Within Sovereign Wealth Funds

As sources of long-term, patient capital, sovereign wealth funds (SWFs) offer immense potential for countries to achieve their national development goals. Yet as the extensive list of examples in this compilation will document, SWFs are at grave risk of embezzlement, fraud, political manipulation, and other corrupt uses. At the center of the problem is a lack of transparency and accountability, which limits access to comprehensive, accurate data. Available data on SWFs is extremely limited, which creates opportunities for bad actors to abuse funds for their own interests. Little is known about the investments, operations, or internal management of the vast majority of funds around the world, which collectively manage over $11.5 trillion in assets.1 Without this detailed financial and operational information, the door is being left wide open for rapacious managers and political elites to misappropriate investment earnings. Their actions deprive citizens and other stakeholders of the opportunity to equally and justly benefit from fund proceeds.

This chapter highlights the many types of corruption and political risks inherent to the SWF industry and demonstrates that recent efforts to improve transparency have fallen woefully short. SWFs should be required to disclose far more extensive and detailed information about the way they develop strategies, manage assets, compensate executives, engage financial intermediaries, and report to political overseers. Only by expanding the availability of this critical data can SWFs become truly accountable to their public constituents.

The Secret Lives of SWFs

Operating as government-owned or government-controlled investment vehicles, SWFs acquire assets in private and public financial markets both in their home countries and abroad. Having state ownership in some ways sets the SWF industry apart from the private investment fund industry, which includes hedge funds, venture capital, and private equity. First, the stated missions of SWFs can go beyond maximizing investment returns; for example, they can aim to achieve macroeconomic stability or realize economic development initiatives domestically. Rather than pursuing speedy exits, SWFs often have long-term horizons and operate as passive investors that take minority rather than controlling stakes in target companies. Finally, there is an explicit political layer that distinguishes SWFs from private investment funds. Without having fiduciary duties to private investors and clients, SWFs are completely beholden to the governments that endow them. Politicians have considerable power to shape SWF investment strategies to pursue explicit political goals.

Yet even though their home governments can exert influence over their operations, SWFs in practice behave very similarly to certain types of private investment funds. Structurally, SWFs are often set up identically to private equity funds, with capital committed to the fund managed by an external general partner. This investment model endows the general partner with greater autonomy to apply expertise and develop portfolio strategies, but it also can result in bloated financial fees and crony relationships that undermine the fund’s financial performance. In contrast to popular perceptions, many SWF investments do not end up in publicly traded companies that have strictly regulated transparency obligations and fiduciary responsibilities. Just like their counterparts in the venture capital, private equity, and hedge funds industries, SWFs often purchase minority stakes in unlisted, privately held companies.2

This shared investment preference results in clear similarities in how both SWFs and investment funds are regulated. Most countries require little, if any, transparency from investment funds (including SWFs) about transactions made outside of public markets. In the United States, for example, SWFs are held to the exact same regulatory requirements as private pools of capital.3 SWFs are only required to publicly disclose equity stakes equal or greater to 5 percent of publicly traded companies. Any remaining investments in privately held companies need not be disclosed to shareholders, the general public, or regulatory authorities; for these investments, SWFs are on their own to decide what information to disclose. SWFs have adopted a number of rationales to justify preserving this opacity around their investments, including the threat of domestic political short-term pressures that could undermine their long-term investment strategies. The end result is that with few exceptions, records of SWF investments in unlisted assets—whether a private company or a real estate project—are not publicly available.

The overlap between SWFs and private investment funds is even more pronounced by the fact that many SWFs have become increasingly large investors in private equity, a sector notorious for its opacity.4 From 1984 to 2007, twenty-nine SWFs made more than 2,500 direct private equity investments worth a total of $198 billion.5 Indeed, SWFs comprise nineteen of the top forty institutional investors in private equity worldwide.6 In the wake of the 2007–2008 global financial crisis, SWFs have even begun accruing substantial debt and using leverage to fund some investments—another trademark strategy of the private equity industry. SWFs also often act as coinvestors with massive private equity funds. Furthermore, SWFs have adopted their own arcane corporate structures called subfunds to coordinate sectoral investments. For example, Egypt’s SWF includes four subfunds, each with its own governance, legal structure, investment process, and independent board.7 These vehicles add a layer of opacity and complicate outside analysts’ ability to understand the true extent of their holdings.

Instead of enforcing transparency, regulators work to limit the “control” SWFs can exert over the companies they acquire stakes in. The majority of SWF investments, whether through private equity or other direct investments, are made in international markets rather than domestic markets. The extensive use of government-owned assets to buy foreign companies has given rise to suspicions about the political motives behind SWF decisions, which could disrupt markets in support of government interests.8 Countries such as France, Germany, and the United States are putting in place increasingly strict protocols for evaluating whether SWF investments are being made in sensitive sectors and therefore could generate national security or corporate espionage concerns. Yet many of these protectionist procedures are classified, and it can be difficult for investors to learn when government scrutiny of SWFs investments is ongoing. SWFs operate in a climate of secrecy, with few if any windows into their operating behavior.

Voluntary Self-Regulation Has Made Only Minimal Progress

Surprisingly, the enormous rise of cross-border SWF investments has not sparked the creation of a centralized international regulatory body to oversee the industry. Instead, growing nervousness among countries hosting SWF investments compelled representatives from twenty-three leading funds to found the International Working Group of SWFs in 2008. The group worked together to develop a set of twenty-four voluntary principles, known as the Santiago Principles, to improve transparency and governance. These voluntary standards ask SWFs to define their policy purposes, government arrangements, roles and responsibilities, and ownership rights, among other issues.9 Widespread adoption of such principles was intended to discipline SWF behavior and reassure host countries and the general public about the intentions behind these investments, as well as potentially forestall protectionist actions.10 However, voluntary participants’ compliance with the Santiago Principles still leaves much to be desired. The International Forum of Sovereign Wealth Funds (IFSWF) has no power to enforce its own standards, and naming and shaming efforts by other nongovernmental organizations have been mostly absent. This means that only a few SWFs fully adhere with these basic good governance standards.

Moreover, even those SWFs adhering to the Santiago Principles still fall short of ensuring needed transparency. According to the principles, publicly declaring fund objectives does not entail the release of annual reports that provide in-depth information on how the SWF plans to achieve its objectives. Moreover, there is no clause requiring SWFs to disclose essential information on their financial positions, such as audited statements, that could shed light on the volume of assets under management or on the use of debt instruments and leverage. Although most SWFs report that information to their host-country governments, it is not sent to any international body, such as the International Monetary Fund, that could impartially validate and share the data with third parties. What is left is a highly decentralized system, where SWFs are free to invest trillions abroad but are not required to disclose any comprehensive information on their activities to the public.

The uneven progress toward full transparency is best illustrated through an analysis of the SWF Scoreboard. Developed and run by Edwin M. Truman and colleagues for more than a decade, the SWF Scoreboard aggregates publicly available information (“fund websites, annual reports, and ministries of finance, and other public sources such as IMF reports”) and ranks SWFs on thirty-three elements that cover structure, governance, transparency, and accountability. A higher score indicates that a SWF is implementing more robust governance reforms and disclosing more about its investment activities. Table 1 lists the top ten and the bottom ten SWFs according to the 2019 scores, which range from 11 to 100. 

Table 1: 2019 SWF Scoreboard Rankings
Top Ten Bottom Ten
Country Fund Score Country Fund Score
Norway Government Pension Fund Global 100 Qatar Qatar Investment Authority 46
New Zealand New Zealand Superannuation Fund 94 Saudi Arabia Public Investment Fund 39
United States Permanent Wyoming Mineral Trust Fund 93 Russia Russian Direct Investment Fund 37
Chile Economic and Social Stabilization Fund 92 United Arab Emirates Emirates Investment Authority 36
Azerbaijan State Oil Fund of the Republic of Azerbaijan 92 Kiribati Revenue Equalization Reserve Fund 35
Canada Alberta Heritage Savings Trust Fund 91 Brunei Brunei Investment Agency 30
Timor-Leste Petroleum Fund of Timor-Leste 91 Algeria Revenue Regulation Fund 26
Chile Pension Reserve Fund 89 United Arab Emirates Dubai World 24
United States Alaska Permanent Fund Corporation 88 Libya Libyan Investment Authority 23
Australia Future Fund 87 Equatorial Guinea Fund for Future Generations 11

Source: Julien Maire, Adnan Mazarei, and Edwin M. Truman, “Sovereign Wealth Funds Are Growing More Slowly, and Governance Issues Remain,” Peterson Institute for International Economics, February 2021, https://www.piie.com/publications/policy-briefs/sovereign-wealth-funds-are-growing-more-slowly-and-governance-issues

At the top of the list is Norway’s Government Pension Fund Global, which has consistently demonstrated a world-leading commitment to transparency. The fund’s portfolio value is updated in real time on its website, and it publishes a lengthy annual report detailing board votes, shareholder resolutions, and engagement with target companies, especially on environmental, social, and corporate governance.11 Other SWFs have instituted best practices that hold them accountable to elected officials. Both Australia and New Zealand require managers of their respective SWFs to submit reports regularly to their ministers of finance and, in turn, members of their national parliaments.12 The funds themselves are still completely separate from political institutions and intended solely to pursue profit, but they do not operate in a black hole and are accountable to regulators and monitors.

It is the more advanced democracies that enact stronger arrangements to ensure that SWFs release necessary information. Several funds based in the Middle East, such as the Qatar Investment Authority, have been reducing the amount of information available on their websites and in their annual reports. Singapore’s SWF, Temasek, prioritizes private deals across Asia, either through private equity funds or direct investments in fast-growing sectors such as real estate. Both investment strategies thrive on opacity.13

One of the most important predictors of strong transparency scores on the SWF Scoreboard is a country’s rank on other indexes of good governance. For example, research into SWFs has found a strong correlation between a country’s scoreboard results and the World Bank’s Worldwide Governance Indicator of Voice and Accountability; Transparency International’s Corruption Perceptions Index; and the Polity IV indicator of democracy.14 SWF management may often be a reflection of other wider institutional reforms: where democracy and good governance are weak, SWFs will likely fail to disclose the necessary information to track their operations.15

Parsing the Data Crumbs

The end result is that regulators, journalists, civil society activists, academics, and investors alike are left with regrettably little information about how a large number of SWFs from around the world operate. The little data that are available remain incomplete and prohibitively expensive for most researchers. The first stop for most analysts is third-party aggregators, such as PitchBook, Preqin, and FactSet. These services pull together both publicly available data and insider information to construct a detailed profile of each SWF, including estimated size, investment behavior, performance, intermediary relationship, and governance structure. Because SWFs are government-connected entities, much of the data concern what might be considered public finances, thereby requiring openness and transparency. The global Sovereign Wealth Fund Institute offers similar coverage of self-reported investment patterns through its pricey subscription service. Yet third-party aggregators impose pricey subscriptions on accessing the data, limiting the ability of law enforcement authorities around the world to track how money flows in and out of SWFs.

In the United States, the Securities and Exchange Commission collects and makes publicly available basic information about the private investment fund industry (which includes a small number of SWFs), including manager information and fund size. Funds must fill out somewhat detailed forms about their makeup, but they do not have to reveal their actual investments or performance. Regulators, including those tasked with monitoring foreign investments, are often completely reliant on the private, third-party aggregators mentioned above to gain visibility into SWF activities, increasing the financial and logistical obstacles to undertaking proper due diligence. Only in rare cases are data freely available about how SWFs are managing their assets. For example, the Sovereign Investment Lab based at Bocconi University in Italy has built a database on the investments of twenty-nine SWFs, but this includes those equity stakes in publicly traded companies since they appear in public disclosures released in various jurisdictions.

Moreover, private, third-party aggregators are significantly dependent on SWFs sharing their underlying data. If an SWF, particularly one operating in a nondemocratic country, chooses not to disclose an equity investment, it is unlikely that any of the aggregators will be able to pick up, much less monitor, that activity. In addition, there are large segments of SWF portfolios that are almost completely absent. Bond markets remain mostly opaque, as are investments in domestic asset classes, which for some funds comprise the bulk of assets under management (such as in Russia).16 There are finally few mechanisms for verifying whether the self-reported data are accurate.

Home country regulators presumably collect these data on investments, but only in rare instances (such as in Norway) is any of that information made public. Instead, analysts often glean information on fund objectives and governance from some SWF annual reports and websites. For example, a recent study demonstrates the evolution of declared investment strategies over time as well as innovation and collaboration between SWFs.17 However, annual reports do not contain audited financial statements, nor do they outline in any detail the breadth of investments pursued by funds. Learning about more sensitive topics from these reports is next to impossible, whether it be full lists of nongovernmental investors (foreign and domestic), management fees paid to private investment funds, executive compensation, key relationships with intermediary brokers, or corporate structures facilitating investments (especially through offshore companies).

Leaked documents provide perhaps the only window into some SWFs. In 2018, the global Paradise Papers leak revealed rampant cronyism and corruption within Angola’s SWF, Fundo Soberano de Angola (see chapter 4). The fund paid millions of dollars in management fees through uncompetitive tenders to investment managers closely linked to the country’s ruling elites.18 Even supposedly better-governed funds have been implicated in serious scandals following documents being leaked into the public sphere. A trove of tens of thousands of internal documents from Australia’s Future Fund led to accusations of tax avoidance and exorbitant fees paid out to external fund managers.19 However, such leaks rely on whistleblowers sharing the truth about SWF activities with the wider public—thus, leaks are welcome but highly imperfect mechanisms for ensuring transparency. 

The Risks of Opacity

The risks of this opacity persisting within the SWF industry are immediate and serious. Collectively, SWFs invest trillions of dollars across a host of developing and developed countries. At the macroeconomic level, a lack of transparency raises the specter of real destabilization risks if funds were to fail, be mismanaged, or rapidly withdraw funding from target markets. Lack of oversight into SWFs’ substantial investments could inflate dangerous equity price bubbles.20

Opacity also carries political consequences. Over the past two decades, much of the push to better regulate the SWF industry has been spurred by concerns about political motivations driving investment behavior. To what degree are SWFs independent from the governments that create them? Without transparency, it becomes significantly more difficult to differentiate whether investment decisions are being made on a purely financial basis or with political aims in mind, such as the transfer of corporate intellectual property to domestic companies. In the aftermath of the 2007–2008 financial crisis, an array of SWFs began sweeping up highly discounted assets in troubled developed economies and were credited with partially bailing out the U.S. and European banking systems to the tune of $63 billion.21 Although protectionist sentiments globally have led to more restrictive regulations around SWF investments, a growing body of evidence is revealing that the motivations behind these investments are sometimes geared toward the pursuit of other political goals. U.S. policymakers, for example, have passed much stricter protocols for assessing foreign investments in sensitive sectors in part because of fears that SWFs could be exploiting opacity to acquire information and technology critical to national security.

Some of those fears have not gone unfounded. In examining a dataset of equity stakes taken in U.S. publicly traded firms, research has shown that SWFs have become increasingly attracted to investing in politically active companies.22 Their investments help provide a type of “foreign state insurance,” shielding their home government from possible potential risk but also opening up lobbying opportunities within the U.S. political process.

SWFs that fail to disclose proper information to regulators and the general public are uniquely vulnerable to political co-optation, mismanagement, and outright corruption. The vast sums of money tied up in these funds offer an array of personal and political dividends to the government elites that create them. As the assets of SWFs surged in 2011, nearly three-quarters of all assets under SWF management were held by nondemocratic governments.23 These financial assets can be used to keep incumbent governments in power, for example, by buying citizens’ loyalty and co-opting or neutralizing domestic competitors.24 Therefore, the shield of opacity can hide the use of SWFs as a strategic financial tool designed to aid ruling elites.

A good example of this is Libya’s SWF. Established in 2006, the Libyan Investment Authority’s (LIA) mandate was to invest substantial Libyan financial assets earned from its oil industry into a more diversified portfolio that could function as a reserve fund.25 Even though the fund was carefully managed in near complete secrecy by Muammar al-Qaddafi and his family, it received an influx of foreign capital and took numerous positions in Western companies, such as General Electric, AT&T, and Juventus Football Club.26

It was not until internal fund documents were leaked to the British nongovernmental organization Global Witness that the world began to learn about of the full extent of the LIA’s investment behavior, including the $64 billion amassed.27 A later audit by Deloitte suggested that upward of 20 percent of the fund’s value had disappeared into a black hole, presumably lining the pockets of the ruling elite.28 Accusations were also leveled at Goldman Sachs, whose investment managers allegedly paid prostitutes and bought private jets and stays in five-star hotels in an attempt to woo business from the LIA.29 Ultimately, the fund became one of the first targets of sanctions imposed by the UN Security Council amid rampant accusations from insiders of corruption and misappropriation by the Qaddafi government and its external partners.30

Recent work on African states has drawn attention to a new category of unofficial SWFs that behave almost identically to their official counterparts but disclose even less information to the general public.31 Known as extra-budgetary resource funds, these vehicles operate in near complete secrecy; they do not appear in annual budgets or comply with even basic reporting or audit standards. These funds provide nondemocratic governments with the ability to invest in projects that can pad the pockets of loyal elites and help the regime stay in power longer.

In sum, the corruption risks inherent to SWFs are enormous, as several of the chapters in this compilation attest. At least $4.5 billion was stolen from Malaysia’s SWF (see chapter 3), in what became the “world’s biggest financial scandal.”32 The scandal wound up snaring individuals from over ten countries, including the then Malaysian prime minister. In 2020, the prime minister was sentenced to twelve years in prison for engaging in corruption and abuse of power. A recent investigation of Uzbekistan’s SWF implicates the country’s leadership in directing tens of millions of dollars to a corporation run by a relative of President Shavkat Mirziyoyev.33 As more and more countries begin the process of creating their own funds, there is a real threat of continued corruption unless good governance standards are put in place.

Strengthening Transparency Will Improve Accountability

Given the macroeconomic, political, and corruption risks associated with SWFs, there must be greater transparency across the industry as a whole. What types of information should SWFs disclose? First, fundamental information on SWF finances needs to be disclosed: the value of assets under management; the short- and long-term performance indicators; the allocations across markets and investments; the benchmarks; and the environmental, social, and corporate governance metrics. Ideally, these data points would be validated through external audits. This type of information should be required from the entire pooled investment industry, which thrives on the same opacity that SWFs do and is vulnerable to many of the same problems.

Organizationally, SWFs should also better identify their key policy objectives as well as their governance structures, including board selection and responsibilities and the fund’s relationships with policymakers and regulators. Alongside releasing more information about SWF internal operations, countries need to carve out a greater role for popularly elected legislatures and independent agencies to supervise those activities and ensure that investments are being made in the national interest. Improving reporting mechanisms is a key step along that path, but those in charge of public oversight must also be empowered to hold SWF managers accountable. Transparency fosters accountability only when stakeholders and other observers can act on the disclosed information and prevent the co-optation of SWFs for political motivations.

Voluntary disclosure is not enough. Although the Santiago Principles provide a template for cooperation between funds, until a major international organization steps in to publish true third-party evaluations, compliance and disclosure practices will likely remain incomplete. So far, fragmented efforts to name and shame SWFs for neglecting good governance principles have not led to real and durable change. Given the importance of cross-border investments within SWF portfolios, the international community must take a stronger stance and empower a body to monitor SWF governance.

SWFs have much to gain by being more transparent about their operations and investment decisions. Companies targeted by more transparent SWFs typically generate higher investment returns, suggesting that transparency can be a strong signal of quality due diligence and monitoring on the part of SWFs.34 Transparency also allows for more objective evaluations on whether SWFs are actually meeting their policy and performance objectives, which should improve funds’ abilities to raise and borrow capital. Conversely, SWFs that are vulnerable to political interference see lower returns on their investments and more negative deterioration of long-term performance in targeted companies.35 Investors have expressed frustration with a lack of access to timely statistics from SWFs based in Middle East, particularly when large withdrawals occurred shortly after oil prices fell.36 In that regard, transparency is a win-win for the vast majority of SWF stakeholders. If entrenched elites are allowed to monopolize management and disclosure decisions, corruption will thrive.

Notes

1 William Megginson, Asif Malik, and Xin Yue Zhou, “Sovereign Wealth Funds in the Post-pandemic Era,” Journal of International Business Policy 6 (April 2023): 1–23, https://doi.org/10.1057/s42214-023-00155-2.

2 Veljko Fotak, Bernardo Bortolotti, William Megginson, and William Miracky, “The Financial Impact of Sovereign Wealth Fund Investments in Listed Companies,” unpublished working paper, University of Oklahoma and Università di Torino (2008).

3 Richard A. Epstein and Amanda M. Rose, “The Regulation of Sovereign Wealth Funds: The Virtues of Going Slow,” University of Chicago Law Review, March 3, 2009, 111–34.

4 Cyril Monnet and Erwan Quintin, “Rational Opacity,” Review of Financial Studies 30, no. 12 (2017): 4317–4348, https://doi.org/10.1093/rfs/hhx034.

5 Shai Bernstein, Josh Lerner, and Antoinette Schoar, “The Investment Strategies of Sovereign Wealth Funds,” Journal of Economic Perspectives 27, no. 2 (2013): 227, https://doi.org/10.1257/jep.27.2.219.

6 William L. Megginson, Diego Lopez, and Asif I. Malik, “The Rise of State-Owned Investors: Sovereign Wealth Funds and Public Pension Funds,” Annual Review of Financial Economics 13, no. 1 (2021): 247–270, https://doi.org/10.1146/annurev-financial-110420-090352.

7 “The Sovereign Fund of Egypt,” International Forum of Sovereign Wealth Funds, n.d., https://www.ifswf.org/members/sovereign-fund-egypt.

8 Edwin M. Truman, “Sovereign Wealth Fund Transparency and Accountability Explored,” Wake Forest Law Review 52 (2017): 997.

9 Greg Golding, “Australia’s Experience with Foreign Direct Investment by State Controlled Entities: A Move Towards Xenophobia or Greater Openness,” Seattle University Law Review 37, no. 2 (2014): 533.

10 Enrico Ginevra and Chiara Presciani, “Sovereign Wealth Fund Transparency and the European Rules on Institutional Investor Disclosure,” Wake Forest Law Review 52, no. 4 (2017): 815–835.

11 Joe Marsh, “Why Norway’s $1.3trn Wealth Fund Prizes Transparency So Highly,” Capital Monitor (blog), June 22, 2021, https://capitalmonitor.ai/institution/asset-owners/why-norways-1-3trn-wealth-fund-prizes-transparency-so-highly.

12 Sven Behrendt, “Sovereign Wealth Funds in Nondemocratic Countries: Financing Entrenchment or Change?,” Journal of International Affairs 65, no. 1 (2011): 65–78.

13 Bernstein, Lerner, and Schoar, “The Investment Strategies of Sovereign Wealth Funds,” 234.

14 Truman, “Sovereign Wealth Fund Transparency and Accountability Explored.”

15 Di Wang and Quan Li, “Democracy, Veto Player, and Institutionalization of Sovereign Wealth Funds,” International Interactions 42, no. 3 (2016): 390, https://doi.org/10.1080/03050629.2016.1130313.

16 Veljko Fotak, Xuechen Gao, and William L. Megginson, A Financial Force to Be Reckoned With? An Overview of Sovereign Wealth Funds (Oxford: Oxford University Press, 2016).

17 Caroline E. Nowacki, Ashley Monk, and Bertrand Decoster, “Who Do Sovereign Wealth Funds Say They Are? Using Structural Topic Modeling to Delineate Variegated Capitalism in Their Official Reports,” Environment and Planning A: Economy and Space 53, no. 4 (2021): 828–857.

18 David Pegg, “Head of Angola’s Wealth Fund Fired after Paradise Papers Revelations,” Guardian, January 11, 2018, https://www.theguardian.com/news/2018/jan/11/head-angola-wealth-fund-fired-paradise-papers-revelations.

19 Chris Newlands, “Low Tax and High Fees Consume Future Fund,” Financial Times, July 11, 2015, https://www.ft.com/content/dbf7f11e-2632-11e5-bd83-71cb60e8f08c.

20 Fotak, Gao, and Megginson, A Financial Force to Be Reckoned With?

21 Victoria Barbary and Bernardo Bortolotti, “Sovereign Wealth Funds and Political Risk: New Challenges in the Regulation of Foreign Investment,” World Scientific Studies in International Economics 21 (2013): 307–339, https://doi.org/10.1142/9789814390842_0009.

22 Paul Calluzzo, G Nathan Dong, and David Godsell, “Sovereign Wealth Fund Investments and the US Political Process,” Journal of International Business Studies 48, no. 2 (2017): 222–243.

23 Victoria Clare Barbary and Bernardo Bortolotti, “Taming Leviathan: Foreign Investment, Political Risk and a Regulatory Framework for Sovereign Wealth Funds,” Social Science Research Network, July 1, 2011, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1878373.

24 Kyle Hatton and Katharina Pistor, “Maximizing Autonomy in the Shadow of Great Powers: The Political Economy of Sovereign Wealth Funds,” Columbia Journal of Transnational Law 50 (2011): 1; Rawi Abdelal, “Sovereign Wealth in Abu Dhabi,” Geopolitics 14, no. 2 (2009): 317–327; Larissa Nawo et al., “Unofficial Sovereign Wealth Funds and Duration in Power in Africa,” United Nations University–World Institute for Development Economics Research, September 17, 2019, https://doi.org/10.35188/UNU-WIDER/2019/691-3.

25 Behrendt, “Sovereign Wealth Funds in Nondemocratic Countries.”

26 Robert O’Harrow Jr and James V. Grimaldi, “Libyan Gold Rush Followed End to Sanctions,” Washington Post, May 25, 2011, https://www.washingtonpost.com/world/middle-east/libyan-gold-rush-followed-end-to-sanctions/2011/05/25/AGGgbVBH_story.html.

27 Behrendt, “Sovereign Wealth Funds in Nondemocratic Countries.”

28 Sarah Townsend, “Fifth of Libya’s Wealth Fund Untraced Since Gaddafi,” Arabian Business, July 29, 2015, https://www.arabianbusiness.com/politics-economics/fifth-of-libya-s-wealth-fund-untraced-since-gaddafi-600913.

29 Jill Treanor, “Société Générale to Pay £815m to Settle Libyan Lawsuit,” Guardian, May 5, 2017, https://www.theguardian.com/business/2017/may/04/societe-generale-libyan-investment-authority.

30 Tim Eaton, “Libya: Investing in the Wealth of a Nation,” Chatham House, February 24, 2021, https://www.chathamhouse.org/2021/02/libya-investing-wealth-nation.

31 Nawo et al., “Unofficial Sovereign Wealth Funds and Duration in Power in Africa.”

32 Randeep Ramesh, “1MDB: The inside Story of the World’s Biggest Financial Scandal,” Guardian, July 28, 2016, https://www.theguardian.com/world/2016/jul/28/1mdb-inside-story-worlds-biggest-financial-scandal-malaysia.

33 “Millions From Uzbek Wealth Fund Paid to President’s Relative, Investigation Shows,” Radio Free Europe/Radio Liberty’s Uzbek Service, September 15, 2021, https://www.rferl.org/a/uzbekistan-mirziyoev-family-enrichment/31461801.html.

34 Jason Kotter and Ugur Lel, “Friends or Foes? Target Selection Decisions of Sovereign Wealth Funds and Their Consequences,” Journal of Financial Economics 101, no. 2 (2011): 360–381.

35 Bernardo Bortolotti, Veljko Fotak, and William L. Megginson, “The Sovereign Wealth Fund Discount: Evidence from Public Equity Investments,” Review of Financial Studies 28, no. 11 (2015): 2993–3035.

36 Abeer Abu Omar, “Biggest Gulf Wealth Funds Are Faulted for Lagging on Governance,” Bloomberg, July 4, 2021, https://www.bloomberg.com/news/articles/2021-07-04/biggest-gulf-wealth-funds-are-faulted-for-lagging-on-governance.

Chapter 3: Sovereign Wealth Funds as Vehicles for Money Laundering: The Case of 1MDB

The infamous 1Malaysia Development Berhad (1MDB) scandal is an exemplary case of how sovereign wealth funds can be used to facilitate corruption and money laundering. The U.S. Department of Justice (DOJ), in a July 2016 indictment, called it the “largest kleptocracy case to date.”1 The 1MDB, a sovereign investment and development fund, was supposedly designed to use money borrowed by the Malaysian Ministry of Finance to raise funds for development through global investments. Instead, as noted in the DOJ indictment and “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.3 Per the same DOJ indictment, the laundered assets of 1MDB “allegedly 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.”4 Over $1 billion reportedly went into then Malaysian prime minister Najib Razak’s personal bank accounts alone.5 

The perpetrators seemingly got away with the heist by leveraging the permissive, secretive nature of offshore companies and the immense wealth of the Gulf states and their sovereign wealth funds. These funds, which oversee vast cash resources, are on the surface professionally administered for the purposes of investment in the global marketplace. However, in the 1MDB case, they were ultimately at the whim of a handful of members from autocratic ruling families and some of their key enablers.

1MDB was purportedly “based on the Mubadala (Sovereign Wealth Fund) concept” in Abu Dhabi.6 (The Mubadala fund is examined more closely in chapter 11.) The money was obtained not from accumulated public funds, however, but through a series of bond offerings ultimately guaranteed by Malaysian taxpayers. As a result, a 2020 Malaysian government report assessed that the fund was still in arrears after several repayments, $7.8 billion in debt from a height of over $11 billion when the scandal exploded in 2015.7

This chapter provides a comprehensive look at what happened to the 1MDB fund between 2009 and 2015 to illustrate how sovereign wealth funds can be used for gross corruption. It examines how Najib Razak, a Malaysian kleptocrat, and his proxy, Jho Low, with advisers from Goldman Sachs bank and other willing professionals, exploited overly centralized power structures, weak governance, and feeble accountability mechanisms to steal billions for themselves and their collaborators. It also describes how the Chinese government exploited Najib Razak’s need to resolve the scandal and fund his reelection bid to bolster China’s influence in Malaysia. The corruption was likewise exploited by other foreign actors, including royal figures and businessmen in the Gulf, to siphon billions in return for providing cover.

Much of the 1MDB deception was made possible due to high-level collaborators at the International Petroleum Investment Fund (IPIC) in the United Arab Emirates (UAE) and at funds in Saudi Arabia and Kuwait. The 1MDB case provides a useful foundation for making sense of the other cases in this compilation, and it underscores the transparency and accountability reforms required to minimize similar, future abuse of citizens’ financial security by political elites.

The Roots of Corruption

The 1MDB heists occurred from 2009 to 2014, during Najib Razak’s first term. Malaysia is a resource-rich nation, where high-level corruption has flourished for decades. The prime minister’s ruling United Malays National Organisation (UMNO) party had enjoyed an uninterrupted grip on power since independence in 1957, largely through an extensive patronage system. But toward the end of the prime minister’s first term, he—and the UMNO more broadly—faced credible opposition for the first time.

The UMNO playbook under such circumstances was to amass an invincible election war chest. Najib Razak appointed himself as finance minister to ensure complete control over the country’s highly centralized economy. This context alone should have raised red flags for financial institutions involved with 1MDB.

Malaysian politicians have often used local, long-established Chinese business proxies to facilitate corruption. In this case, Najib Razak worked with a young, Chinese Malaysian financier named Jho Low. Low’s family members were well established in the business community in Penang Province. By the time his ambitious parents sent him to the elite Harrow School outside of London and the University of Pennsylvania’s prestigious Wharton School, Low was well versed in offshore accounts and shell companies—as well as Malaysia’s pervasive culture of cronyism. His first introduction to the future prime minister came during a business deal with one of the prime minister’s brothers, Nizam Razak.8 His later narrative would be that he had connected with Najib Razak’s influential wife Rosmah Mansor through her son Riza Aziz, whom he claimed to have befriended in the United Kingdom.9

Low operated during a period of major investment by sovereign wealth funds in the Gulf, from which Malaysian leaders were eager to benefit. What set Low apart was his contacts—though often exaggerated—with sons of Middle Eastern power brokers formed during his schooling. Through lavish parties, Low skillfully introduced “titled” friends from the Gulf to impress his connections in Kuala Lumpur. Some of these introductions were bogus. For example, one Wharton School contact, Hamad al-Wazzan, found himself invited as a star guest to a dinner held for Najib Razak on the false pretense of being the son of a Kuwaiti construction magnate with a similar name.

In 2005, Low’s Wynton Group, a private equity firm, established an office in Kuala Lumpur in partnership with Nizam Razak and embarked on its first major project, the development of a major condominium, the Oval Residences.10 Funding for the project came from the Kuwaiti Investment House, which was connected to Low through al-Wazzan, who would become close to Sheikh Sabah, a grandson of the emir of Kuwait. Low would later tout the sheikh as one of the Middle Eastern investors behind his shadowy British Virgin Islands–based vehicle, the Abu Dhabi-Kuwait-Malaysia Investment Corporation (ADKMIC). This corporation later embarked on major projects in Malaysia under the banner of having investments from the Middle East.11

Listed as ADKMIC’s key shareholders were ADIA Investment Corp and KIA Investment Corp, which appeared to be subsidiaries of the Abu Dhabi Investment Authority and the Kuwait Investment Authority, two major Gulf sovereign wealth funds. However, as the anonymous bearer shareholdings made clear, they were not actually linked to those Gulf funds. Instead, they were entities Low had created and registered in the Seychelles. He employed this ruse repeatedly, exploiting the secrecy of offshore havens and plagiarizing major names to disguise shell companies as legitimate subsidiaries to more easily transfer huge sums of money through the banking system.12

In 2007, the main opportunities for state investment in Malaysia were connected to the government-backed Iskandar Development Project in the south of the country. Thanks to his political connections, Low attained special access and was empowered to secure a “master developer” for the project.13 Touting this access, the young Malaysian reached out to a major player in Abu Dhabi, Sheikh Yousef al-Otaiba. Otaiba, who would later be appointed ambassador to the United States, was supremely well connected as the son of the former president of the Organization of the Petroleum Exporting Countries. Name-dropping him as a “friend” (to Otaiba’s evident annoyance) cemented Low’s reputation as someone with access to Gulf money.14

While Malaysia’s sovereign wealth fund, Khazanah, ostensibly oversaw the Iskandar project, a leaked email from Low to Otaiba confirmed that Malaysian politicians really pulled the strings. As the email noted, “Khazanah is a separately managed investment arm of the Government of Malaysia. Having said that, the key target partners are cleared at our board level, which is chaired by the Prime Minister of Malaysia.”15

On his end, Otaiba mobilized his connection to Khaldoon al-Mubarak, the chief executive officer of Abu Dhabi’s Mubadala sovereign wealth fund, to engage with Low’s project. Mubadala invested in Iskandar as part of a government-to-government enterprise, illustrating the importance of political connections in determining investment decisions.16

Leaked details reveal that Low paid Otaiba handsomely, including a 10 percent stake in ADKMIC.17 Despite Otaiba’s alarm at the Malaysians’ garrulous use of his name and ostentatious spending at nightclubs and casinos, the two men developed several future joint ventures from which Otaiba allegedly received at least $66 million, according to Wall Street Journal estimates.18

In 2008, Low also took credit for an investment made by Abu Dhabi Commercial Bank in Malaysia’s RHB Bank at double the stock price.19 Once again, Otaiba’s influence likely helped finalize the deal. The agreement led Low, Nizam Razak, and ADKMIC to enter into business directly with Abdul Taib Mahmud, Nizam’s in-law and chief minister of the Malaysian province of Sarawak. The RHB holding originally belonged to Taib’s UBG consortium, providing him with major profits. Low then persuaded the chief minister to invest the windfall into various assets he had himself acquired in Iskandar. This enabled Low to earn large fees by flipping Iskandar assets at inflated prices while also steering contracts to support his construction investments.20 But when some of these investments subsequently failed, the Sarawak chief minister pressured Low to bail out the project. As a result, as executive director of the merged company, Low steered UBG to direct more cash into the purchase of two local construction companies to purportedly work on the development.21 Low did so via a secretive injection of stolen cash from 1MDB in 2010.22

Connections in High Places

It was through these engagements in Sarawak that Low connected with another set of actors who became key to the evolution of the 1MDB heists: Goldman Sachs banker Roger Ng and his boss, Tim Leissner. At Ng’s later trial in New York, it emerged that upon meeting Ng in Sarawak, Low boasted of his contacts in the Middle East and the Razak government. Goldman Sachs was looking to make government connections, so in January 2009, Ng introduced his boss to Low. The partnership between Leissner and Low transformed Low’s ventures into a global enterprise by linking them to the credibility and clout of a major bank.23

Other partners in Low’s ventures in Sarawak were members of the royal house of the Malaysian state of Terengganu, whose sultan was serving as the rotating federal head of state at the time. Low had placed the sultan’s sister onto the board of one of his construction subsidiaries, and he worked closely with her husband, Abdul Aziz Mohd Akhir.24 The sultan, in his role as chairman of the newly formed Terengganu Investment Authority (TIA), touted TIA as a sovereign wealth fund to be based on oil royalties owed to the state, appointing Aziz and Low as advisers.25

At an initial meeting with the sultan, however, Low explained that his strategy was primarily to raise funds by issuing bonds. As an adviser who attended that meeting explained, “What I understood . . . was that TIA would create a fund through issuance of bonds for overseas investment. It was expected to reap profits for the company, which would be channelled back to the people through government community service programmes.”26 This excuse of raising money for foreign investment to fund development would be repeated several times after the fund was rebranded as 1MDB under Najib Razak’s direct control. Instead, money went straight into the pockets of the prime minister and his family, Low, and their collaborators.

Low used his influence to ensure that Goldman Sachs was selected to advise on raising an initial bond issue worth $1.4 billion for TIA.27 The reputational advantages of partnering with a major U.S. bank were significant. With Najib Razak’s backing (but against the wishes of the Terengganu sultan and his chief minister, who felt increasingly sidelined), the Goldman Sachs team worked with Low and TIA’s chief executive officer, Shahrol Halmi, to swiftly raise the funds through the local AmBank.28 On this occasion, Goldman Sachs did not handle the offer directly. AmBank (which has since been fined), via highly questionable practices, initially discounted the bonds through two companies that Low controlled, earning him and his associate Eric Tan some $125 million before the bonds reached the open market in May 2009.29

For various reasons, including the clash over the controversial bonds, Terengganu’s leadership then withdrew from the fund. Najib Razak, by now prime minister as well as finance minister, swiftly remodeled the fund under his government’s control. Goldman Sachs would describe the resulting structure in future bond offers as “professionally managed and governed by global best practices” with a board of directors “independent from undue political influence” and a senior international advisory board.30 But the entire arrangement contained a secret amendment that established the minister of finance (Najib Razak) as the sole signatory and shareholder of the company with veto power over appointments and expenditures. Most of the key management appointments in senior legal and finance positions were connected to Low, in particular the general counsel Jasmine Loo, business development director Casey Tang, chief investment officer Nik Faisal Ariff Kamil and executive director of finance Terence Geh.31

Directors soon found that management acted on the orders of Low in his capacity as proxy to the finance minister, in contravention of their own directives.32 The first chairman almost immediately resigned, protesting that the board’s objections had been overruled after the entire equity of the fund was invested in an obscure offshore entity named PetroSaudi International. An ally of Najib Razak replaced the chairman.33 By the time the fund was rebranded as 1MDB in July 2009, three months into Najib Razak’s premiership, it was structured as a perfect vehicle for the kleptocratic plunder that would soon take place.

Laundering the TIA Bond Through PetroSaudi

Leissner testified that Goldman Sachs had hoped to advise on possible investments around a planned 1MDB joint venture with a Saudi state petroleum fund. Low, however, had a different ploy in mind.

He had connected with a young, party-going Saudi named Tarek Obaid, who was in business with Prince Turki bin Abdullah Al Saud, the seventh son of the then ruler of Saudi Arabia, King Abdullah. Prince Turki had little personal wealth, but his proximity to power proved ideal for Low’s schemes. In August 2009, aboard a yacht off the coast of Monaco, Najib Razak signed 1MDB’s first investment deal, plunging the entire $1 billion sitting in 1MDB’s account into one of Obaid and Turki’s jointly held shell companies, PetroSaudi International.34 As with so many of Low’s offshore vehicles, the name had a grandiose official ring; however, the company held no connection to the Saudi state and had few assets and little human capital.35

Returning to New York in early September 2009, Low sought to finalize the deal by the last day of the month—in a haste that should have raised red flags. Nonetheless, White & Case, a major London law firm, and several banks, including JP Morgan Suisse, RBS Coutts Zurich, and Deutsche Bank Kuala Lumpur, signed off on it, providing a facade of legitimacy that got the deal past regulators. In addition, an investment adviser friendly with Obaid named Patrick Mahony assisted PetroSaudi in “acting as a front” on deals for 1MDB. The “ask” from Low was to help siphon out $700 million from the billion-dollar joint venture in return for $300 million that would be invested in the fledgling PetroSaudi’s various ventures.36

Mahony requested that White & Case manage the entire process in coordination with Low’s team in New York within the now-three-week deadline. The legal teams outlined a plan to transfer the assets of an offshore holding company in the Cayman Islands, PetroSaudi International Holdings, into a new subsidiary, 1MDB PetroSaudi Ltd, registered in the British Virgin Islands—and in the process, advance the subsidiary what was now described as a “loan” as opposed to a fee.37 1MDB was due to buy a 40 percent share of 1MDB PetroSaudi Ltd under a joint venture agreement that stipulated in veiled language that it would immediately repay any debts owed by the company in hard cash.38

The justification later given by Najib Razak was that the payment was made in recognition of the value of the injected $1.5 billion in fictional assets, a Turkmenistan oil field that PetroSaudi did not really own. According to the U.S. Department of Justice, White & Case issued the loan agreement that purportedly paid the $700 million into 1MDB PetroSaudi Ltd before the new subsidiary had even established a bank account.39 (The Carnegie Endowment for International Peace approached White & Case for comment on this purported payment, but they failed to respond.)

The deal was pushed through under immense political pressure in early October 2009. The payments were nonetheless delayed as anxious banks, and the 1MDB’s own law firm, Wong & Partners, requested information as to why the immediate $700 million “loan” repayment was scheduled to be transferred not to the 1MDB PetroSaudi Ltd account just set up at JP Morgan Suisse but to a mysterious Good Star Limited account at Coutts bank in Zurich. The White & Case team confirmed to 1MDB’s own lawyers that Good Star Limited was a PetroSaudi subsidiary, despite the fact that it appeared nowhere in the structures they had drawn up for the deal.40 It was in fact an account owned by Low.41

1MDB management made plain to its Deutsche Bank bankers that the finance minister/prime minister was becoming impatient and that delays would bring consequences. So, the transfers were agreed. The beneficial ownership for Good Star was merely provided in the form of a PO Box address in the Seychelles.42

Following the successful transfer of funds to Good Star, Low and Mahony, again with the assistance of White & Case, constructed a second $500 million “Islamic loan” from 1MDB to PetroSaudi Ltd and then made a further $330 million in foreign “investments” that were likewise misused for the benefit of the conspirators. Obaid received a payment of $85 million for his services, from which he paid Mahony $35 million and Turki $77 million.43 Much of the rest funded PetroSaudi Ltd’s new venture, the purchase of drill ships off the coast of Venezuela through a highly lucrative contract achieved by bribing officials from the state oil company PDVSA. 1MDB was not included in the profits from this enterprise (totalling $340 million) despite the “joint venture investment” it had made.44 In April 2023, Turki and Mahoney were indicted by Swiss officials for their role in the 1MDB corruption scandal.45

Low then ploughed around $360 million from the Islamic loan into what was presented as a separate buyout of UBG (one of Low’s companies) by PetroSaudi Ltd. But in reality, he set up an entity named PetroSaudi International in the Seychelles, ostensibly owned by Obaid but secretly controlled by Low through an “investment management” agreement with a Panama shell company.46 Malaysia’s controlled media obediently relayed the official version of events, but it also reported on the growing opposition clamor over such blatantly suspicious activities.47

Post-PetroSaudi 2011

Within days of the Good Star heist, Low embarked on a stunningly excessive spending spree in several U.S. cities—splashing hundreds of thousands of dollars at nightclubs in Los Angeles; hiring supermodels to attend his parties; purchasing mansions in Hollywood and New York City, along with a jet, sports cars, and a yacht; and gambling huge sums in high-end casinos in Las Vegas.48 He spent $85 million between October 2009 and June 2010 alone, sparking comments about the ostentatious “Nightclub Whale” and “Malaysian Man of Mystery” in the New York press.49 Goldman Sachs’ Business Intelligence Group, in tandem with other reputation-wary finance divisions, began to flag Low as a person of unexplained means to watch and avoid doing open business with.50 Leissner’s Southeast Asia team, however, with the knowing approval of his immediate senior partners at the bank, continued to court business with Low as Najib Razak’s proxy.51 Shortly after Low’s publicity provoked suspicions within Goldman Sachs’ compliance divisions, the bank’s chief executive officer, Lloyd Blankfein, sat down with Najib Razak and Low in New York in a meeting that Leissner had arranged.52

During this period, Low developed a key connection with a fellow extravagant spender, Khadem al-Qubaisi, the right-hand man to Abu Dhabi’s Sheikh Mansour bin Zayed Al Nahyan, whose brother was then crown prince and deputy prime minister of the UAE. Al-Qubaisi was the chief executive officer of IPIC, one of the Emirate of Abu Dhabi’s sovereign wealth funds. Sheikh Mansour was its chairman, as well as the chairman of a new IPIC subsidiary, Aabar.53

Both Low and al-Qubaisi exploited their position as trusted proxies at sovereign wealth funds to benefit themselves and the politically connected officials who employed them. It has been reported that al-Qubaisi steered the funds he controlled to projects he privately had money in.54 By early 2011, Low had embarked on a number of deals with al-Qubaisi, including a failed bid to take over London’s Maybourne hotel group, although Low had claimed he had severed all connections with the fund.55 The two even hatched a plot to buy the same share of Malaysia’s RHB Bank that the Abu Dhabi Commercial Bank had bought back in 2008, based on inside knowledge of a projected takeover bid that Najib Razak, in his second role as finance minister, would have been aware of. Low suggested that Aabar could flip the shares and make half a billion dollars on the resale within six months. Aabar bought the shares from its own national bank. The entourage that swept into Kuala Lumpur in April 2011 to sign the deal included the then crown prince (now Emirati president) himself, Mohammed bin Zayed Al Nahyan. In the end, the gambit failed, as Aabar’s outrageous sell-on price meant to maximize its illegal profits caused the merger to collapse.56

The Goldman Sachs Bonds

Two years after the Good Star deal, critics of 1MDB increasingly honed in on the fund’s burgeoning debt, audit delays, inactivity, and a series of highly suspicious restructurings. Nonetheless, in June 2012, 1MDB reinvested proceeds from its relationship with PetroSaudi International into a Cayman Islands–registered investment vehicle.57 The accounting firm KPMG refused to sign off on the audit without proof of the profits, however. Najib Razak sacked the firm in retaliation.58 Despite these concerns, Goldman Sachs continued its relationship with the fund. In January 2012, Low contacted his connections at the bank for investment ideas to justify a new bond issue for 1MDB. Low was able to offer this business to Goldman Sachs without requiring a public tender. Leissner suggested purchasing an aging power plant that another of his Malaysian clients wished to sell, and Low invited Leissner and Ng to meet in London to discuss the deal.

Goldman Sachs agreed to launch a bond offering of $1.75 billion to purchase the plant for $650 million and to cover “other operating expenses.” The bank would raise the entire amount and then sell on the bonds to its private customers, thereby keeping the process “below radar” in terms of market scrutiny. In return, Goldman Sachs demanded massive fees of just over 9 percent, over 100 times the market rate.59

Why the high fees and secretive process? As Leissner would later testify to U.S. authorities following his arrest in 2017 and then in court, Low had confided at the 2012 London meeting that he planned to steal the bulk of the money. Low told the bankers they would be bribed over and above any bonuses they could expect. The biggest bribes would need to be paid to Najib Razak and his wife and to Abu Dhabi’s Sheikh Mansour.60 Likewise, al-Qubaisi and his deputy at Aabar, Mohammed al-Husseiny, would need bribes, as would Otaiba for his role in making sure matters were handled smoothly in the UAE.61 The recipients of these payments were reaffirmed in court papers for a Swiss trial of a senior official of the Lombard Odier bank in June 2023. The official had been charged with laundering a total of $50 million from one of Low’s offshore companies into newly opened accounts at the bank (said to belong to Otaiba and his Emirati business partner Shaher Awartani).62

Leissner and Ng confirmed that they would bring Goldman Sachs into the deal, but to maneuver around compliance officials, they kept their communications with Low off the bank’s official email channels. Leissner testified that his immediate superiors were aware of this deceit. However, the bank’s position is that “none of the past or current members of senior management were involved in or aware” of illicit activity.63 The bank’s position, however, fails to address the anomalies over the $6.5 billion in bonds that would eventually be issued by the bank for very little identifiable purpose and the very high fees they received for it. More than half of the money raised would ultimately be stolen.64

In February 2012, the bankers and Low flew to Abu Dhabi, bearing a formal proposal from Najib Razak to Sheikh Mansour. One month later, the same team reconvened in the United States to finalize the terms. A final piece of the plan was put in place in Singapore at an April meeting between the two Goldman Sachs bankers and Low’s local personal wealth management team from the Swiss bank BSI. (Low, officially absent, communicated from a nearby room.)65

IPIC would “co-guarantee” the bonds. Describing a “strategic alliance between 1MDB Guarantor and IPIC group,” the offer document referred to an options agreement in return for IPIC’s collaboration in underwriting the venture. In fact, the ultimate guarantor of the project was still the government of Malaysia.66

Meanwhile, however, BSI had opened an account for a new offshore British Virgin Islands subsidiary of Aabar Investments PJS for 1MDB to make a payment for the guarantee. There was no mention of such a payment in the formal offer document that would be provided to Goldman Sachs’ clients, but a bogus contract signed between the same executives (Al Husseiny for Aabar and the management of 1MDB) was presented to the BSI bankers and said that the agreed terms between the two sovereign wealth funds for the service was $577 million.67 At the meeting, the BSI team queried the Goldman Sachs bankers as to why the Abu Dhabi sovereign fund would employ an offshore vehicle for such a purpose or use a tiny bank like theirs. They claim Leissner responded by directing the BSI team to conduct its own due diligence and then abruptly left the meeting.68 The bank, which had already performed a series of dubious transactions for Low related to the Good Star scheme, agreed to open the account.69 (BSI later collapsed over its role in the 1MDB scandal.70)

But Aabar Investments PJS in the British Virgin Islands was not owned by 1MDB, although its shareholders were al-Qubaisi and al-Husseiny. As a secret signatory, Low controlled it.71 Thus, by planned agreement, straight after the bond (code-named Project Magnolia) was issued in May 2012, a major chunk of the cash was siphoned off and used to pay the conspirators.

The Swiss bank BSI held the account of a new subsidiary—1MDB Global—into which, after subtracting a $280 million fee for itself, Goldman Sachs passed the remaining $2.721 billion (see figure 1). Within twenty-four hours, BSI had transferred $1.6 billion to Enterprise Emerging Markets, Cistenique, and another “investment fund” called Devonshire. These funds then forwarded the cash to two newly opened offshore company accounts with Falcon Bank—Tanore Finance Corporation and Granton Property Holdings Limited—that were under Eric Tan’s name but controlled by Low.72

Tanore and Granton received $835 million and $430 million, respectively. A total of $1.26 billion was therefore removed from the bond issue. Shoddy paperwork and the weak cover story alerted the Swiss hierarchy at Falcon Bank, which was being asked to forward $681 million of that money into one of Najib Razak’s personal bank accounts. Falcon chief executive officer Eduardo Leeman, himself formerly of Goldman Sachs, would have been aware that Najib Razak had signed off on the 1MDB bond issued just forty-eight hours earlier.73

The U.S. Federal Bureau of Investigation (FBI) obtained recordings of Leeman’s panicked calls to Falcon’s chairman, al-Husseiny. Leeman told him, “This is . . . gonna get everybody in trouble. This is done not professionally, unprepared, amateurish at best,” and would later admonish Low directly.74 However, al-Husseiny overruled his concerns and the transfer went through.75 A month later, Falcon signed off on an additional $27 million from the same Tanore account, which paid for a Lorraine Schwarz pink diamond necklace that Low arranged to be personally fitted and gifted to Najib Razak’s wife Rosmah.76 While a Swiss court in 2021 acquitted Leeman of money laundering charges, he was fined $3.8 million for his role in the scandal.77

The End Game

Najib Razak, with Low’s aid, would engage in numerous subsequent scandals, primarily to cover up the original looting from 1MDB as debt payments loomed but also for personal gain. In 2014, 1MDB raised two syndicated loans totaling $1.2 billion from a consortium led by Deutsche Bank in Singapore, allegedly to buy back the options offered to Aabar in return for the guarantee.78 These options purportedly needed to be liquidated in advance of a planned flotation that Goldman Sachs would manage. In fact, the prime minister hoped to sell the worthless stock to state-controlled entities to write off a debt that now exceeded $11 billion.79 As collateral, 1MDB misrepresented the value of the Cayman Islands “special purpose vehicle” to Deutsche Bank, claiming it had $2.3 billion realized from the PetroSaudi joint venture under the management of a bogus fund, Bridge Partners Investment Management, including $1 billion held at BSI under a company named Brazen Sky. Najib Razak provided a letter of support for the loan.80

Deustche Bank was directed to send the money to the fake Aabar British Virgin Islands account on the understanding that 1MDB was paying the Abu Dhabi sovereign wealth fund to release rights retained under the bond offer document. To reinforce that narrative, Low procured a bogus “agreement related to option agreements” signed by al-Husseiny.81 Money was then sent to more of Low’s offshore shell companies that appeared to be linked to major funds. Low used this money not to pay off debts but to buy luxury goods, including a superyacht, private jet, and artwork. Meanwhile, 1MDB officials carried out complex money transfers with the loaned money to give the impression there was money at Brazen Sky being redeemed from the Cayman Island fund.82 However, the schemers were getting increasingly desperate. When Deutsche Bank asked for copies of the statements of the Brazen Sky account, 1MDB officers first claimed the BSI servers had crashed and then sent an allegedly forged bank statement.83

The entire scheme collapsed on February 28, 2015, when leaked documents from PetroSaudi International were made public by the website Sarawak Report and the Sunday Times, followed by another report in March detailing payments to al-Qubaisi’s Vasco trust fund set up at a bank in Luxembourg from Blackstone Asia Real Estate Partners Limited, a company Low owned.84 Sarawak Report would later reveal information about Good Star and other questionable accounts at BSI Singapore.85 Law enforcement agencies soon launched investigations, spearheaded by the FBI and U.S. Department of Justice’s kleptocracy unit. With a global enquiry underway, law enforcement in Malaysia and Abu Dhabi could no longer turn a blind eye to the abuses of their sovereign wealth funds.

In July 2015, Sarawak Report obtained documentation revealing the $681 million transfer from Falcon Bank into Najib Razak’s personal account. Despite increasing global outrage and multiple investigations, Najib did not back down, denying everything through a controlled domestic media and cracking down on opponents with new “fake news” laws.86

After the United States announced it was seeking to recover stolen assets, Najib Razak turned to then Abu Dhabi Crown Prince (now Emirati President) Mohammed bin Zayed, whom he reminded in a private call that Zayed’s brother, Sheikh Mansour, was implicated in the scandal.87 Abu Dhabi agreed to honor the bogus guarantee as a temporary cover-up to meet 1MDB’s escalating $11 billion in debts. After 1MDB failed to meet the repayment deadline the following year, Abu Dhabi and Malaysia agreed to a secret arbitration agreement in which the emirate continued to shoulder the debt but in return punished Malaysia with a penalty of $8 billion, which Najib Razak promised to pay after the election.88

The prime minister also turned to China, using Low as an intermediary to plug the debt gap. He renegotiated the major East Coast Rail Link infrastructure project with China Communications Construction Company (CCCC), doubling the budget in return for Chinese assistance in repaying 1MDB’s debts.89 Although the agreement immediately leaked, Najib Razak signed the deal in Beijing in November 2015.

The prime minister next engaged another Chinese state-owned enterprise for a gas pipeline project, agreeing to pay 88 percent up front.90 The cash immediately passed through a CCCC subsidiary to a bogus Cayman Island company called Silk Road Real Estate Investment Limited (SRREIL), owned by the Kuwaiti royal Sheikh Jaber al-Mubarak al-Sabah. He covered Low’s legal expenses and other bills while Low was on the run, in return for a money transfer of $1 billion.91 SRREIL returned the bulk of the pipeline money to Malaysia to buy a chunk of land from 1MDB at an inflated cost (land originally gifted by Najib Razak’s Ministry of Finance). That payment was immediately forwarded to Abu Dhabi to meet payments owed under the arbitration agreement. The relationship was later leaked, leading to several arrests and an ongoing money laundering case in Kuwait.92

Thanks in part to the relentless publicity and international investigations, Najib Razak’s UMNO party lost an election for the first time in 2018.93 The incoming government filed several cases against Najib over 1MDB’s schemes, and the following year, a Malaysian court found him guilty on several initial counts and sentenced him to twelve years in prison. That judgement was upheld on August 23, 2022, when he was sent to jail; further cases are ongoing.94

Najib Razak reaped $756 million from the Goldman Sachs bond offerings alone, per an FBI forensic accountant’s court testimony.95 His stepson received $238 million, and over half a billion dollars’ worth of jewelry was purchased for Najib’s wife. Low fled into hiding in China, having stolen $1.42 billion from the fund, according to the same FBI testimony. He remains a fugitive, although some of his key collaborators who fled with him have since surrendered to Malaysian authorities.96 He traveled on a passport issued by Grenada and by way of Dubai.97 Al-Qubaisi received $472.8 million in all.98 Ng received $35.1 million from two of the three bonds that had been issued.99 Leissner received $73.4 million, of which he forfeited $43.7 million as part of his deal with the U.S. government.100 Al-Qubaisi and al-Husseiny were arrested and imprisoned in 2015, and al-Quabaisi received a fifteen-year sentence in 2019 in the UAE.101 However, no actions have been undertaken to investigate Sheikh Mansour’s involvement or the $160 million in payments for his yacht. Goldman Sachs’ Malaysia branch plead guilty and agreed to pay $5 billion in fines to the U.S. government; the DOJ fined its parent bank an additional $2.9 billion.102

This complex case involving multiple sovereign wealth funds highlights some of the structural issues that enabled gross corruption. These issues included poor overall governance of the fund, with its management ultimately resting with the prime minister. Moreover, 1MDB and its subsidiaries used a variety of financial secrecy jurisdictions and tax havens, undermining transparency. There was also a significant failure of oversight by banks, as well as extensive complicity across a wide range of institutions. Similar themes will emerge in the subsequent chapters of this compilation, underlining the need for substantial reforms to many sovereign wealth funds.

Notes

1 “U.S. Seeks to Recover $1 Billion in Largest Kleptocracy Case to Date,” Press Release, Federal Bureau of Investigation, July 20, 2016, https://www.fbi.gov/news/stories/us-seeks-to-recover-1-billion-in-largest-kleptocracy-case-to-date.

2 “United States Seeks to Recover More Than $1 Billion Obtained From Corruption Involving Malaysian Sovereign Wealth Fund,” United States Department of Justice, July 20, 2016, https://www.justice.gov/opa/pr/united-states-seeks-recover-more-1-billion-obtained-corruption-involving-malaysian-sovereign.

3 “Malaysia’s 1MDB State Fund Still $7.8 Billion in Debt—Government Report,” Reuters, November 6, 2020, https://www.reuters.com/article/malaysia-politics-1mdb-idUSKBN27M0VQ.

4 “United States Seeks to Recover More Than $1 Billion Obtained from Corruption Involving Malaysian Sovereign Wealth Fund,” United States Department of Justice.

5 Agence France-Presse, “Malaysian Taskforce Investigates Allegations $700m Pa