The largest corporate scandals of 2018

As a professor teaching fraud and ethics, I study corporate fraud around the clock. 2018 had no shortage of corporate misconduct. Most interestingly, the three largest frauds of 2018 all shared a theme: the use of professionals. 

1MDB: Sovereign wealth and the use of professionals

Sovereign wealth fund 1Malaysia Development Berhad (1MDB) was created to attract foreign investment.  Instead, criminal and regulatory investigations have revealed embezzlement on an industrial scale. This was perpetrated by former Prime Minister Najib Razak and those surrounding him. 

The Malaysia Parliament has identified at least $4.2 billion in fraud in 1MDB. Shockingly, in November 2018, the Department of Justice has implicated three senior Goldman Sachs bankers, and one of them, Goldman’s Southeast Asia chairman and a managing director, has pleaded guilty. Malaysia has now filed criminal charges against Goldman. This is a first for a U.S. investment bank. 

But, it is not just bankers. The attorney trust accounts of two of the nation’s largest law firms, Sullivan & Cromwell, and Sherman & Sterling, were used to conceal the embezzlements from 1MDB. 

Yet, it was not just bankers and lawyers: Considerable questions have also been raised in 2018 about 1MDB’s auditors, in this case, accounting firm Deloitte.

Prior audit work was also done by EY and KPMG, though the fraud was apparently not detected by any of the three firms. Four billion dollars of fraud should have been within the ken of any of the three firms.

Not to be outdone, the finale allegation involves a Department of Justice lawyer (who resigned in August 2018), who used shell companies to launder roughly $75 million, purportedly to be used to engage in illegal lobbying of U.S. government officials with the hope they go light on those being investigated in the 1MDB scandal.   

Amazingly, the proposed lobbying firm to receive the $75 million from this DOJ attorney was owned by Elliot Broidy’s wife. Yes, that Elliot Broidy, the president’s personal friend who impregnated a Playboy model and was forced to resign as deputy finance chairman from the Republican National Committee in disgrace.

Amazingly, this case did not take honors as the top fraud of 2018. 

Operation Car Wash

I spent 2015-2016 as the U.S. banking expert who reviewed the Panama Papers, the investigation of which was awarded the Pulitzer Prize for explanatory reporting in 2017. The story churned out of control in 2018, as it brought down the Brazilian government. It also created at least two Netflix movies, “The Mechanism,” and “The Laundromat.”

Almost every party in the Brazilian legislature has been subject to investigation. The former president was impeached; her predecessor was convicted of money laundering; and her successor is being investigated by the very people being portrayed by Netflix. 

As crazy as a multi-billion-dollar fraud would appear, this is not what makes the fraud notable. Rather, it is the involvement of professionals, in this case, attorneys, including those in the United States. 

Specifically, in April 2018, a lawsuit was filed, which alleges that U.S. law firm titan Baker McKenzie was involved in professional misconduct. Specifically, the lawsuit alleges that a Brazilian prosecutor participated for several weeks in strategy sessions with Baker McKenzie attorneys, while he was still employed as a prosecutor.

A day after he left public service, he was in Washington, D.C., alongside lawyers from Baker McKenzie, delivering a presentation to Department of Justice officials. As 2018 comes to a close, this case continues to play out. Something must be done.   

Money laundering scandals concerning EU banks conducting business in the U.S.

I am the former chief of enforcement of the Federal Deposit Insurance Corporation (FDIC), and the special counsel for enforcement for the Office of the Comptroller of the Currency.

In my view, the largest corporate scandal of 2018 is the involvement of EU banks that have been centrally involved in the Panama and Paradise Papers, in laundering billions of dollars for kleptocrats, money launderers and ordinary everyday tax cheats. 

This is no joke. HSBC, based in London, estimates that it may be required to pay $1.5 billion in fines to U.S. regulators. Germany’s largest bank, Deutsche Bank, was raided by hundreds of German police in November 2018, and these investigators specifically were ordered to search each board of directors office.

What makes this situation perhaps the most outrageous is that multiple federal government senior executives have breached their duties as government officials to partake in the revolving door and join the very organizations being investigated for money laundering. 

Deutsche Bank’s American legal counsel was none other than the man who led the Enforcement Division of the U.S. Securities and Exchange Commission, Robert Khuzami. HSBC’s global anti-money laundering officer is none other than FinCEN’s departed director, Jennifer Shasky Calvery. 

HSBC’s chief lawyer is none other than Stuart Levey, the former Treasury Department’s under secretary for terrorism and financial intelligence. Is this proper under the circumstances? 

It is absolutely unacceptable for former senior federal executives to allow their names and roles to be utilized to engage in questionable, or in this case, clearly outrageous (and illegal) conduct. 

When will Congress act to curtain misconduct by professionals? 

David P. Weber is an attorney and certified fraud examiner. He is a professor at the University of Maryland, where he teaches in the MBA, MS and undergraduate programs. He is the U.S. expert who reviewed the Panama Papers, which was awarded the Pulitzer Prize for Explanatory Reporting in 2017.