Bonnie and Clyde: top City law firm gets caught up in fraud case
March 6, 2021
2 min read
What's going on here?
The US Department of Justice has served a warrant to seize $330m held in an escrow account by Clyde & Co LLP in connection with a complex fraud against the Malaysian state fund 1MBD.
What does this mean?
In 2009, Malaysia launched a state-run development fund called 1MDB (1Malaysia Development Berhad). However, a scandal emerged when $681m was transferred into the personal bank account of then Prime Minister and chairman of the fund, Najib Razak. Following investigations, the Department of Justice (DoJ) alleged that more than $4bn had been embezzled and covertly moved around the globe. This money was allegedly spent on, among other things, luxury real estate and financing the film “The Wolf of Wall Street”.
DoJ prosecutors also allege that some of the money was diverted to a joint venture between 1MDB and an oil company, PetroSaudi. This led to Clyde & Co being brought in to represent PetroSaudi when disputes arose over unpaid invoices with PDVSA, a Venezuelan state-owned oil company. After an arbitration tribunal, PetroSaudi won the case and was awarded $380m, which was mostly transferred into Clyde & Co’s escrow account. However, the DoJ alleges that this money is a product of fraud, as the illicit funds were used by PetroSaudi to purchase “two secondhand and ageing drillships”. Following this questionable purchase, PetroSaudi won the contract to carry out drilling in Venezuela.
What's the big picture effect?
Clyde & Co have emphasised that “our involvement only arises because we held the funds to the order of, and at the direction of, an arbitration tribunal”, referring to the ruling that PetroSaudi was entitled to receive the money. Nevertheless, the DoJ insists that regardless of the arbitration award, the funds are the proceeds of crime. On top of this, PetroSaudi last year sued Clyde & Co after the firm refused to transfer the payment out of its escrow account out of fears that criminal charges would be made. The firm has stated that it will comply with any legal and regulatory obligations in this case.
With London’s future as a major financial centre in question following Brexit (see another LittleLaw report on this by clicking here), the UK legal sector must uphold its global reputation and distance itself from questionable activity in the city. The EU is already worried about a UK deregulation party, any question of criminality won’t help the UK’s case for equivalence.
This story highlights the importance of firms conducting thorough due diligence and know-your-client (KYC) checks, in order to verify the background of a client and evaluate any potential risk of illegal activity. Clyde & Co declined to respond to The Guardian on what due diligence had been conducted and when it had first learned of the allegations against PetroSaudi. In such a competitive legal market, reputation is a highly valuable asset for firms and with increasing compliance regulation, these checks are more important than ever.
Report written by a LittleLaw Reporter
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