What’s a few missing billions among friends: Why Malaysia 1MDB scandal might not dent US ties

U.S. President Barack Obama (L) listens as Malaysian Prime Minister Najib Razak (R) speaks during a joint press conference at the prime minister's residence in Putrajaya, near Kuala Lumpur on April 27, 2014.
Jim Watson | AFP | Getty Images

A sweeping U.S. investigation into assets allegedly looted from a state fund in Malaysia has raised the heat on Prime Minister Najib Razik, but it wasn't entirely clear that would dent the two countries' ties.

Malaysia's status as a moderate Muslim-majority nation in Southeast Asia has helped the country develop a solid relationship with the U.S., offering a bulwark against extremism. Indeed, last year, during a visit to Malaysia, U.S. President Barak Obama called the country's voice "critical" on counter-terrorism efforts.

But the long-running scandal over billions of dollars missing from the Malaysia state fund 1MDB came to roost in the U.S.

In July, the U.S. Department of Justice moved to seize more than $1 billion of assets tied to an international conspiracy to launder funds funnelled away from 1MDB, including funds related to the film "The Wolf of Wall Street."

That complaint said officials at 1MDB, their relatives and other associates diverted more than $3.5 billion from the state fund and laundered it through complex transactions and shell companies with bank accounts in Singapore, Switzerland, Luxembourg and the U.S.

The producer of "The Wolf of Wall Street," Red Granite Pictures, was co-founded by Riza Aziz, the stepson of Malaysia's Prime Minister Najib Razak.

Riza was named as a "relevant individual" in the complaint, but Najib wasn't named. However, media have reported, citing unnamed sources, that the complaint's 32 references to "Malaysian Official 1," who allegedly received hundreds of millions from 1MDB, were to Najib.

On Thursday, Abdul Rahman Dahlan, a senior government minister in Najib's cabinet, said that Malaysian official 1 was Najib, confirming statements he made in a BBC interview published earlier Thursday. Rahman's statement noted that Malaysian official 1 was only referred to in the civil suit, not named as a subject.

Najib has repeatedly denied wrongdoing, as have Riza and Red Granite Pictures.

In addition to the allegations of money laundering, there's another development that may complicate the Malaysia-U.S. relationship: Once the assets are seized, U.S. officials don't appear likely to return them to Malaysia, analysts said.

In any kleptocracy case, it would do no good to give assets back to people who stole them in the first place, noted Eric Berg, a former Department of Justice attorney, who previously worked with the kleptocracy initiative on money laundering.

The U.S. government was more likely to look at other options, such as deploying the funds to non-profits active in the assets' home country or find some way to invest the funds on the country's behalf, Berg, who is currently a litigation attorney at Foley & Lardner, told CNBC recently.

But he noted that "certainly implicates foreign policy."

That's an idea echoed by Oh Ei Sun, who was political secretary to Malaysia's Prime Minister's Office from 2009-11; Najib took office as prime minister in 2009. Oh told CNBC that if the U.S. investigation continued it would have some adverse influence on bilateral relations.

"At least from the Malaysian side, this concept of separation of powers between for example the executive as well as, for example, the more independent portions of the Department of Justice, I don't think that is well understood in a Malaysian context," he said on Wednesday.

But Oh added that he didn't expect a particularly large impact on bilateral relations.

"You may hear government-inspired media making some noises, but this is not serious because Malaysia is not in an economically powerful position to really openly criticize the U.S.," said Oh, who is currently a senior fellow at S. Rajaratnam School of International Studies in Singapore.

"You will hear the Malaysian media obligatorily condemning it, but that's about it," he said. "You wouldn't see Malaysian citizens going on the streets and doing major protests."

But James Chin, the director of the Asia Institute at the University of Tasmania, said the main impact on the relationship would likely come once U.S. law enforcement officially named "Malaysian official 1," citing the likelihood that official would be forced to resign.

But Chin noted that the process of seizing the U.S. assets would normally take at least five years.

"People don't have to worry about embarrassing Najib, because he'll be out of power by then," Chin said.

He expected that the U.S. was more interested in restoring confidence in its financial system after the alleged 1MDB-related money-laundering than in embarrassing Najib.

But he added that there likely wouldn't be any further one-on-one meetings between Najib and Obama.

Others noted that the relationship between the U.S. and Malaysia could face some bumps.

"Nothing happens in total isolation when it comes to diplomacy," noted Wan Saiful Wan Jan, chief executive at the Institute for Democracy and Economic Affairs.

On a longer term perspective, Wan Saiful expected that the Malaysia-U.S. relationship was bigger than any individual, but in the shorter term, he said there would be some challenges with the current government.

He expected some "diplomatic wrangling" to try to ensure no criminal charges were brought against the prime minister.

For the longer term, however, Wan Saiful noted that China was making more investments into Malaysia and he expected that might serve as signals to the U.S. of potential political ramifications.

"It may not be completely dominated by this case, but you cannot isolate them completely," he said.

When asked for comment via email, the Malaysian prime minister's office referred to three official statements made in July.

One from Malaysia's Minister of Communications and Multimedia, Salleh Said Keruak, said "1MDB has been the subject of unprecedented politically-motivated attack, the objective of which was to unseat a democratically-elected head of government."

A separate July statement from the prime minister's office said the Malaysian government would cooperate with any lawful investigation and a third statement from Malaysia's Attorney General's office disputed that any investigation had found evidence that funds were misappropriated from 1MDB.

Questions about movement of funds from 1MDB came to widespread attention a little over a year ago, when the Wall Street Journal reported that in 2013, nearly $700 million had flowed from the debt-ridden fund to Najib's personal bank account.

Najib has repeatedly denied wrongdoing and, under pressure from the outcry caused by the WSJ report, said the funds were a private donation from a Middle Eastern country he declined to name at that time. He has denied benefiting personally from the funds.

In January, Malaysia's Attorney General Mohamed Apandi Ali said that Saudi Arabia's royal family gave Najib a $681 million gift, of which Apandi said about $600 million was later returned.

Apandi said that no criminal offense had been committed. But globally, investigations into 1MDB in locales as varied as the U.S., Switzerland, Singapore and the Seychelles have continued.

In July, the U.S. Department of Justice alleged that funds laundered from 1MDB were used to purchase assets including high-end real estate and hotels in New York and Los Angeles, a $35 million jet aircraft, artwork by Vincent Van Gogh and Claude Monet, a stake in EMI Music publishing rights and production of the 2013 film "The Wolf of Wall Street," which ironically was not only about a corrupt stockbroker, but also was banned from playing in Malaysia for being too risqué.

The film's producer, Red Granite Pictures, which was co-founded by Najib's stepson Riza, has previously said that "none of the funding it received four years ago was in any way illegitimate," adding that the U.S. lawsuit didn't indicate the company knew otherwise.

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—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1