Sovereign Wealth Funds: Corruption and Other 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.

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.

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.

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.

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.

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.

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.

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. 

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.

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 Paid to PM Najib,” Guardian, July 6, 2015, https://www.theguardian.com/world/2015/jul/06/malaysian-task-force-investigates-allegations-700m-paid-to-pm-najib.

⁶ “TIA Was Jho Low’s Idea and Najib’s ‘Baby’, Court Told,” Borneo Post Online, September 4, 2019, https://www.theborneopost.com/2019/09/04/tia-was-jho-lows-idea-and-najibs-baby-court-told/.

⁷ Rozanna Latif, “Explainer: How Malaysia is seeking to recover billions of dollars missing from 1MDB,” Reuters, May 11, 2021, https://www.reuters.com/world/asia-pacific/how-malaysia-is-seeking-recover-billions-dollars-missing-1mdb-2021-05-11/.

⁸ “I Fear They Want to Make Me the Fall Guy! Hamad Al Wazzan,” Sarawak Report, July 11, 2020, https://www.sarawakreport.org/2020/07/i-fear-they-want-to-make-me-the-fall-guy-hamad-al-wazzan-exclusive-interview/.

⁹ “Siapa Sebenarnya Low Hock Peng, Bapa Jho Low?,” Astro Awani, August 24, 2018, https://www.astroawani.com/berita-malaysia/siapa-sebenarnya-low-hock-peng-bapa-jho-low-183829.

¹⁰ Hafidz Baharom, “Just Who Is Jho Low,” Focus Malaysia, August 24–30, 2013, https://politikus.sinarproject.org/persons/low-taek-jho/257068179.pdf.

¹¹ “Low Dispels Talk He Received RM500mil Airbase Job,” Star, July 30, 2010, https://www.thestar.com.my/news/nation/2010/07/30/low-dispels-talk-he-received-rm500mil-airbase-job.

¹² “Investigative Report on 1MDB: Jho Low Uses Bearer Share Firms and Those With Sovereign Names to Mislead,” Edge Malaysia, April 10, 2017, http://www.theedgemarkets.com/article/investigative-report-1mdb-jho-low-uses-bearer-share-firms-and-those-sovereign-names-mislead; “United States of America v. All Funds Held in Escrow by Clyde & Co. in the United Kingdom as Damages or Restitution in PetroSaudi V. PDVSA UNCITRAL Arbitration, No. CV 2:20-cv-8466," United States District Court for the Central District of California, September 16, 2020, https://www.justice.gov/opa/press-release/file/1317321/download. On page 71: “The practice of utilizing a bank account held by an entity with a name that mimics a well-known commercial enterprise is a technique commonly employed to lend the appearance of legitimacy to transactions that might otherwise be subject to additional scrutiny by the financial institutions involved, for example, because of the size of the transaction or because of the role of a politically-exposed person or entity in the transaction.” 

¹³ “Billion Ringgit Question for Boustead and UMNO’s Defence Ministers,” Sarawak Report, January 26, 2022, https://www.sarawakreport.org/2022/01/billion-ringgit-question-for-boustead-and-umnos-defence-ministers/.

¹⁴ “Low Dispels Talk He Received RM500mil Airbase Job,” Star.

¹⁵ “More Leaks—How Business Flourished With Otaiba as Jho Low ‘Re-Branded’ From Party Boy to ‘Philanthropist’......,” Sarawak Report, August 8, 2017, http://www.sarawakreport.org/2017/08/more-leaks-how-business-flourished-with-otaiba-as-jho-low-re-branded-from-party-boy-to-philanthropist/.

¹⁶ Gurmeet Kaur and Cecilia Kok, “Early Business Dealings,” Star, November 1, 2014, https://www.pressreader.com/malaysia/the-star-malaysia-starbiz/20141101/281784217367156.

¹⁷ “More Leaks—How Business Flourished With Otaiba as Jho Low ‘Re-Branded’ From Party Boy to ‘Philanthropist’......”; and “Why Did Jho Low’s Company Good Star Pay Aabar’s Top Executive Khadem al-Qubaisi USD$20.75 Million?,” Sarawak Report, March 20, 2015, http://www.sarawakreport.org/2015/03/why-did-jho-lows-company-good-star-limited-pay-aabars-top-executive-khadem-al-qubaisi-usd20-75-million/.

¹⁸ Bradley Hope and Tom Wright, “U.A.E.’s Ambassador to U.S. Linked to 1MDB Scandal,” Wall Street Journal, June 30, 2017, https://www.wsj.com/articles/u-a-e-s-ambassador-to-u-s-linked-to-1mdb-scandal-1498864605.

¹⁹ “Low Dispels Talk He Received RM500mil Airbase Job,” Star.

²⁰ “Jho Low Made RM400 Million by Quick Flip of Iskandar Land Deal,” Edge Malaysia, April 3, 2015, http://www.theedgemarkets.com/article/jho-low-made-rm400-million-quick-flip-iskandar-land-deal.

²¹ Kaur and Kok, “Early Business Dealings.”

²² “‘Project Uganda’—Why Was a UBG Bank Executive Employed as 1MDB’s Investment Manager During PetroSaudi’s Loan and Buy Out Negotiations?,” Sarawak Report, March 3, 2015, http://www.sarawakreport.org/2015/03/project-uganda-why-was-a-ubg-executive-employed-as-1mdbs-investment-manager-during-petrosaudis-loan-and-buy-out-negotiations/.

²³ “United States v. Ng Chong Hwa, No. 18-CR-00538," United States District Court Eastern District of New York, April 8, 2022, https://www.justice.gov/criminal-fraud/fcpa/cases/ng-chong-hwa.

²⁴ “Low Dispels Talk He Received RM500mil Airbase Job,” Star.

²⁵ Ben Shane Lim, “Trouble at 1MDB From Day One,” Edge Malaysia, April 8, 2016, http://www.theedgemarkets.com/article/trouble-1mdb-day-one.

²⁶ “TIA Was Jho Low’s Idea and Najib’s ‘Baby’, Court Told,” Borneo Post Online.

²⁷ “Jho Low Made Key Decisions in TIA Even before It Became 1MDB, US Court Told,” Free Malaysia Today, February 23, 2022, https://www.freemalaysiatoday.com/category/nation/2022/02/23/jho-low-made-key-decisions-in-tia-even-before-it-became-1mdb-us-court-told/; and Exhibit A, “Fulton County Employees’ Retirement System v. Goldman Sachs Group, Inc., No. 1:19-cv-01562-VSB,” United States District Court Southern District of New York, filed November 13, 2020, https://www.saxenawhite.com/wp-content/uploads/2020/11/Second-Amended-Complaint.pdf.

²⁸ Shane Lim, “Trouble at 1MDB From Day One.”

²⁹ “Malaysia Probes How Jho Low May Have Gained From Pre-1MDB Deal,” Straits Times, January 24, 2019, https://www.straitstimes.com/asia/se-asia/malaysia-probes-how-jho-low-may-have-gained-from-pre-1mdb-deal.

³⁰ “More Questions Over Goldman’s Former Asia Boss,” Sarawak Report, April 24, 2016, http://www.sarawakreport.org/2016/04/more-questions-over-goldmans-former-asia-boss/. The Sarawak Report explains, “1MDB has a stringent risk management control function, with the Board of Directors holding ultimate accountability for the risk and related control environment and being responsible for approving and reviewing risk policies and methodologies. The Board of Directors is supported in this task by board delegated committees for reviewing and challenging risk information, which in turn are supported by a Risk Management Department, along with strategic business and support units. 1MDB also has stringent ‘Chinese wall’ and whistle-blower policies in light of the sensitivity of its projects and investments.”

³¹ “"PROJECT UGANDA" - Why Was A UBG Bank Executive Employed As 1MDB's Investment Manager During PetroSaudi's Loan And Buy Out Negotiations?,” Sarawak Report, March 3, 2015, https://www.sarawakreport.org/2015/03/project-uganda-why-was-a-ubg-executive-employed-as-1mdbs-investment-manager-during-petrosaudis-loan-and-buy-out-negotiations/.

³² “What Bakke Salleh Told the Authorities,” Sarawak Report, October 8, 2020, https://www.sarawakreport.org/2020/10/what-bakke-salleh-told-the-authorities-swiss-scoop-exclusive/.

³³ “The Financial Imbroglio of Prime Minister Najib Razak, Where ‘Friends & Associates Rule,’” C4 Center (blog), May 17, 2015, https://c4center.org/financial-imbroglio-prime-minister-najib-razak-where-friends-associates-rule-0/.

³⁴ “Directors Rated PetroSaudi Project As Being Worth ‘Zero’!,” Sarawak Report, January 11, 2016, http://www.sarawakreport.org/2016/01/tarek-rated-petrosaudi-project-as-being-worth-zero/.

³⁵ “Malaysia, Saudi Arabia Form US$2.5b Joint Venture,” Star, September 30, 2009, https://www.thestar.com.my/business/business-news/2009/09/30/malaysia-saudi-arabia-form-us25b-joint-venture.

³⁶ “The PetroSaudi Files—Fact or ‘Fraud’?,” Sarawak Report, March 4, 2016, http://www.sarawakreport.org/2016/03/the-petrosaudi-files-fact-or-fraud/.

³⁷ “The PetroSaudi Files—Fact or ‘Fraud’?,” Sarawak Report.

³⁸ “The PetroSaudi Files—Fact or ‘Fraud’?,” Sarawak Report.

³⁹ “Malaysia Gets $1.5bln Saudi Investment,” Reuters, September 30, 2009, https://www.reuters.com/article/malaysia-saudi-fund-idINKLA01042620090930; and “United States of America v. All Funds Held in Escrow by Clyde & Co. in the United Kingdom as Damages or Restitution in PetroSaudi V. PDVSA UNCITRAL Arbitration,” United States District Court for the Central District of California, 22.

⁴⁰ White & Case, “JV Structure Steps Plan,” downloadable at https://www.sarawakreport.org/files/2015/06/Web-version-POWER-POINT-2-Petro-Saudi-JV-Structure-Steps-Plan-3.ppt.

⁴¹ Sharanjit Singh, “Ex-1MDB Board Member Says Najib Pushed for JV With PetroSaudi After Jho Low Handed Him Phone,” New Straits Times, April 1, 2022, https://www.nst.com.my/news/crime-courts/2022/04/785187/ex-1mdb-board-member-says-najib-pushed-jv-petrosaudi-after-jho-low.

⁴² “United States of America v. All Funds Held in Escrow by Clyde & Co. in the United Kingdom as Damages or Restitution in PetroSaudi V. PDVSA UNCITRAL Arbitration,” United States District Court for the Central District of California, 23–32.

⁴³ “Project Uganda,” Sarawak Report; “Were 1MDB Auditors “Complicit”? Queries DAP,” Sarawak Report, March 5, 2015, https://sarawakreport.org/2015/03/were-1mdb-auditors-complicit-queries-dap; “Further USD$330 Million Went Straight to Jho Low’s Good Star Limited From 1MDB! New Exclusive,” Sarawak Report, April 25, 2015, https://sarawakreport.org/2015/04/further-usd330-million-went-straight-to-jho-lows-good-star-from-1mdb-new-exclusive; and “Raking in the Profits from Malaysia!,” Sarawak Report, October 12, 2015, https://sarawakreport.org/2015/10/raking-in-the-profits-from-malaysia.

⁴⁴ “PetroSaudi’s 1MDB-Financed Venezuelan Gamble and the Money It Didn’t Make,” Sarawak Report, January 15, 2017, http://www.sarawakreport.org/2017/01/petrosaudis-1mdb-financed-venezuelan-adventure-and-the-money-it-didnt-make; and Harry Davies, "$340m in London law firm's account suspected of 1MDB connection," The Guardian, August 3, 2020, https://www.theguardian.com/world/2020/aug/03/340m-in-london-law-firms-account-suspected-of-1mdb-connection.

⁴⁵ They were not explicitly named in the Swiss indictment, but the description of the roles and payouts of the unnamed indictees matches exactly those of Turki and Mahoney. See “Finally—Swiss Prosecutors Indict the PetroSaudi Boys!,” Sarawak Report, April 25, 2023, https://www.sarawakreport.org/2023/04/swiss-indict-the-petrosaudi-boys/.

⁴⁶ “‘Project Uganda'—Why Was a UBG Bank Executive Employed as 1MDB’s Investment Manager During PetroSaudi’s Loan and Buy Out Negotiations?,” Sarawak Report.

⁴⁷“PetroSaudi Raises Stake in UBG to 89.8%,” Star, January 12, 2010, https://www.thestar.com.my/business/business-news/2010/01/12/petrosaudi-raises-stake-in-ubg-to-898; and “Anwar Warns Najib’s RM15 Bil 1MDB Could Sink Malaysia,” Malaysia Today, September 20, 2010, https://www.malaysia-today.net/2010/09/20/anwar-warns-najibs-rm15-bil-1mdb-could-sink-malaysia/.

⁴⁸ Brian Niemietz and Jennifer Gould, “Big-Spending Malaysian Is the Mystery Man of City Club Scene,” New York Post, November 8, 2009, https://nypost.com/2009/11/08/big-spending-malaysian-is-the-mystery-man-of-city-club-scene/.

⁴⁹ Carmela Chirinos, “Meet Jho Low, the Fugitive 1MDB Financier Who Paid to Party With Leonardo DiCaprio,” Fortune, March 7, 2022, https://fortune.com/2022/03/07/jho-low-fugitive-1mdb-financier-biography/.

⁵⁰ Tarani Palani, “Roger Ng Fraud Trial in New York: Jho Low Raised ‘Host of Red Flags’ in Goldman’s Compliance Checks in 2010,” Edge Malaysia, March 23, 2022, http://www.theedgemarkets.com/article/roger-ng-fraud-trial-new-york-jho-low-raised-host-red-flags-goldmans-compliance-checks-2010.

⁵¹ Patricia Hurtado, “Senior Goldman Staff Knew About Jho Low, 1MDB, Leissner Says,” Bloomberg, February 16, 2022, https://www.bloomberg.com/press-releases/2022-02-16/ex-goldman-banker-tim-leissner-to-take-stand-in-1mdb-case.

⁵² Patricia Hurtado and Greg Farrell, “Blankfein Meeting Was to Get Najib Kids Goldman Jobs, 1MDB Jury Told,” Bloomberg, February 22, 2022, https://www.bloomberg.com/news/articles/2022-02-22/goldman-ex-banker-leissner-reveals-code-names-from-1mdb-scandal.

⁵³ “‘King Khadem’ and His Sovereign Wealth!,” Sarawak Report, September 26, 2015, http://www.sarawakreport.org/2015/09/king-khadem-and-his-sovereign-wealth-in-depth-investigation/.

⁵⁴ “More on the Massive US Investment Portfolio of Disgraced Ex-Falcon Bank Boss Khadem Al Qubaisi,” Sarawak Report, December 4, 2015, http://www.sarawakreport.org/2015/12/more-on-the-massive-us-investment-portfolio-of-disgraced-ex-falcon-bank-boss-khadem-al-qubaisi/.

⁵⁵ “The Real Wolves of Wall Street! The Boys From Aabar and Their Friends From Malaysia,” Sarawak Report, September 22, 2015, http://www.sarawakreport.org/2015/09/the-real-wolves-of-wall-street-the-boys-from-aabar-and-their-friends-from-malaysia-exclusive-investigation/; and "Jho Low Denies 1MBD link, Frustrated London Hotel Buy," MalayMail, May 5, 2014, https://www.malaymail.com/news/malaysia/2014/05/05/jho-low-denies-1mbd-link-frustrated-london-hotel-buy/663441.

⁵⁶ “Jho Low—How PM ‘Agreed’ Plans to Make USD500M (‘Minimum’) Profit From Insider Deal Against CIMB/Maybank,” Sarawak Report, May 17, 2015, http://www.sarawakreport.org/2015/05/jho-low-how-pm-agreed-plans-to-make-usd500m-minimum-profit-from-insider-deal-against-cimbmaybank-exclusive/.

⁵⁷ Daniel Stacey, Bradley Hope, and Tom Wright, “Hunt for Billions Invested by 1MDB Points to Australia,” Wall Street Journal, November 3, 2015, https://www.wsj.com/articles/hunt-for-billions-invested-by-1mdb-points-to-australia-1446528646.

⁵⁸ “Ex-1MDB CFO: Jho Low Told Najib Not to Say Much to KPMG, Gave Instructions on What to Say,” Malay Mail, November 16, 2021, https://www.malaymail.com/news/malaysia/2021/11/16/ex-1mdb-cfo-jho-low-told-najib-not-to-say-much-to-kpmg-gave-instructions-on/2021273.

⁵⁹ “Goldman Sachs’ US$200million Charge for 1MDB Bond Issue!,” Sarawak Report, July 8, 2013, http://www.sarawakreport.org/2013/07/goldman-sachs-us200million-charge-for-1mdb-bond-issue; and Rozanna Latiff, “Understanding Goldman Sachs’ Role in Malaysia's 1MDB Mega Scandal,” Reuters, October 22, 2020, https://www.reuters.com/article/us-goldman-sachs-1mdb-settlement-explain-idUKKBN2772HC.

⁶⁰ “Sheikh Wouldn’t ‘Get Out of Bed’ for Less Than 100 Million Dollars, Leissner Tells Court,” New Straits Times, February 25, 2022, https://www.nst.com.my/news/crime-courts/2022/02/774528/sheikh-wouldnt-get-out-bed-less-100-million-dollars-leissner-tells.

⁶¹ “Prosecution Tells Jury to Follow the Money, Return Guilty Verdict as Roger Ng and Co-Conspirators Stole Billions of Dollars from People of Malaysia,” Edge Malaysia, April 6, 2022, http://www.theedgemarkets.com/article/prosecution-tells-jury-follow-money-return-guilty-verdict-roger-ng-and-coconspirators-stole.

⁶² “Another Swiss Banker Charged With Laundering 1MDB Millions,” Sarawak Report, June 9, 2023, https://www.sarawakreport.org/2023/06/another-swiss-bank-charged-with-laundering-1mdb-millions/.

⁶³ “Goldman Sachs’ Statements Relating to 1MDB Government and Regulatory Settlements,” press release, October 22, 2020, https://www.goldmansachs.com/media-relations/press-releases/current/goldman-sachs-2020-10-22.html.

⁶⁴ Hugh Son, “As Goldman’s 1MDB Scandal Deepens, Insiders Doubt the Firm’s Rogue Banker Defense,” CNBC, December 18, 2018, https://www.cnbc.com/2018/12/17/as-goldmans-1mdb-mess-deepens-insiders-doubt-the-firms-rogue-banker-defense.html.

⁶⁵ “Prosecution Tells Jury to Follow the Money, Return Guilty Verdict as Roger Ng and Co-Conspirators Stole Billions of Dollars from People of Malaysia,” Edge Malaysia.

⁶⁶ “Offering Circular,” 1Malaysia Development Berhad and International Petroleum Investment Company PJSC, May 18, 2012, 37, https://www.sarawakreport.org/pdf/ProjectMagnolia.pdf. “Abu Dhabi and 1MDB Guarantor (Malaysian Government) share a history of successful cooperation. . . . and in consideration for the Nominated Subsidiary procuring the Guarantee from IPIC Guarantor in connection with the Notes, 1MDB Energy will grant a call option in favour of the NS or its subsidiaries in relation to certain of the shares the Issuer holds in 1MDB Energy” . . . The Acquisition could potentially lead to further collaborations.”

⁶⁷ “Ng Was Guilty, but the Buck Does Not Stop There,” Sarawak Report, April 10, 2022, https://www.sarawakreport.org/2022/04/ng-was-guilty-but-the-buck-does-not-stop-there/.

⁶⁸ “Ex-BSI Banker: Tim Leissner Dismissed Due Diligence Questions,” finews.asia, March 17, 2022, https://www.finews.asia/finance/36535-ex-bsi-banker-said-tim-leissner-dismissed-due-diligence-questions.

⁶⁹ “Half a Billion USD Was Transferred From Good Star to Jho Low’s BSI Singapore Account!,” Sarawak Report, April 23, 2015, http://www.sarawakreport.org/2015/04/half-a-billion-usd-was-transferred-from-good-star-to-jho-lows-bsi-singapore-account-major-exclusive/.

⁷⁰ Leslie Shaffer, “Singapore’s MAS Shuts 1MDB-Linked BSI Bank Over Gross Misconduct,” CNBC, May 25, 2016, https://www.cnbc.com/2016/05/24/singapores-mas-shuts-1mdb-linked-bsi-bank-over-gross-misconduct.html.

⁷¹ “Ng Was Guilty, But The Buck Does Not Stop There,” Sarawak Report, April 10, 2022, https://www.sarawakreport.org/2022/04/ng-was-guilty-but-the-buck-does-not-stop-there/.

⁷² “United States of America v. All Funds Held in Escrow By Clyde & Co. in the United Kingdom as Damages or Restitution in PetroSaudi V. PDVSA UNCITRAL Arbitration at 87–106,” United States District Court for the Central District of California.

⁷³ “Sensational Findings!—Prime Minister Najib Razak’s Personal Accounts Linked to 1MDB Money Trail,” Sarawak Report, July 2, 2015, https://sarawakreport.org/2015/07/sensational-findings-prime-minister-najib-razaks-personal-accounts-linked-to-1mdb-money-trail-malaysia-exclusive/.

⁷⁴ “United States of America v. All Funds Held in Escrow by Clyde & Co. in the United Kingdom as Damages or Restitution in PetroSaudi V. PDVSA UNCITRAL Arbitration at 92,” United States District Court for the Central District of California, 97.

⁷⁵ “United States of America v. All Funds Held in Escrow by Clyde & Co. in the United Kingdom as Damages or Restitution in PetroSaudi V. PDVSA UNCITRAL Arbitration at 87–106,” United States District Court for the Central District of California.

⁷⁶ “Jho Low Got Rosmah a US$23 mil Pink Diamond Necklace, NY Court Hears,” The Vibes, March 24, 2022, https://www.thevibes.com/articles/news/57015/jho-low-got-rosmah-a-us23-mil-pink-diamond-necklace-new-york-court-hears.

⁷⁷ Michael Shields and John Revill, “Ex-CEO of Swiss Bank Falcon Acquitted in Money-Laundering Trial,” Reuters, December 15, 2021, https://www.reuters.com/markets/europe/ex-ceo-swiss-bank-falcon-acquitted-money-laundering-trial-2021-12-15/.

⁷⁸ “Now Deutsche Bank Under DOJ’s Microscope Over 1MDB,” Malaysiakini, July 11, 2019, https://www.malaysiakini.com/news/483335.

⁷⁹ “Malaysian State Investor 1MDB Sinks to a Loss on Borrowing Costs,” Reuters, November 6, 2014, https://www.reuters.com/article/1mdb-results-idINL4N0SW4BK20141106.

⁸⁰ “United States of America v. All Funds Held in Escrow by Clyde & Co. in the United Kingdom as Damages or Restitution in PetroSaudi V. PDVSA UNCITRAL Arbitration at 192,” United States District Court for the Central District of California.

⁸¹ “United States of America v. All Funds Held in Escrow by Clyde & Co. in the United Kingdom as Damages or Restitution in PetroSaudi V. PDVSA UNCITRAL Arbitration at 110,” United States District Court for the Central District of California, 111.

⁸² Lee Long Hui, “‘Stolen’ 1MDB Funds: The DOJ Lawsuit Revisited,” Malaysiakini, March 31, 2018, https://pages.malaysiakini.com/1mdb/en/.

⁸³ “United States of America v. All Funds Held in Escrow by Clyde & Co. in the United Kingdom as Damages or Restitution in PetroSaudi V. PDVSA UNCITRAL Arbitration at 131,” United States District Court for the Central District of California.

⁸⁴ “New 1MDB Bombshell—Second Jho Low Company Paid Hundreds of Millions to both Najib Razak and Khadem al Qubaisi—Exclusive,” Sarawak Report, January 21, 2016, https://sarawakreport.org/2016/01/new-1mdb-bombshell-second-jho-low-company-paid-hundreds-of-millions-to-both-najib-razak-and-khadem-al-qubaisi-exclusive/

⁸⁵ “Half A Billion USD Was Transferred From Good Star To Jho Low’s BSI Singapore Account!,” Sarawak Report.

⁸⁶ Joseph Sipalan, Praveen Menon, and Simon Cameron-Moore, “Malaysia’s Najib Pushes to Outlaw ‘Fake News’ Before Election,” Reuters, March 5, 2018, https://www.reuters.com/article/us-malaysia-politics-idUSKBN1GH1HV.

⁸⁷ Rozanna Latiff and Joseph Sipalan, “Malaysia Anti-Graft Body Says Audio Clips Show Najib Tried to Cover-up 1MDB Scandal,” Reuters, January 8, 2020, https://www.reuters.com/article/uk-malaysia-politics-1mdb-recordings-idUKKBN1Z712T.

⁸⁸ “Malaysia Challenges $8 Billion Settlement Between 1MDB and Abu Dhabi’s IPIC,” Straits Times, October 30, 2018, https://www.straitstimes.com/asia/se-asia/malaysia-challenges-8-billion-settlement-between-1mdb-and-abu-dhabis-ipic.

⁸⁹ “Outrage!—Najib’s Secret Deal With China to Pay Off 1MDB (And Jho Low’s) Debts!,” Sarawak Report, July 26, 2016, http://www.sarawakreport.org/2016/07/outrage-najibs-secret-deal-with-china-to-pay-off-1mdb-and-jho-lows-debts-shock-exclusive/.

⁹⁰ “Malaysia to Probe Najib Government’s $2-Billion Payments to Chinese Pipeline Firm,” Reuters, June 5, 2018, https://www.reuters.com/article/uk-malaysia-politics-china-idUKKCN1J119G.

⁹¹ “World’s Biggest Bank—China’s ICBC—Now Has HUGE Questions to Answer Over 1MDB,” Sarawak Report, June 23, 2020, https://www.sarawakreport.org/2020/06/worlds-biggest-bank-chinas-icbc-now-has-huge-questions-to-answer-over-1mdb/.

⁹² “The Ten Billion Dollar Boys!,” Sarawak Report, June 2, 2020, https://www.sarawakreport.org/2020/06/the-ten-billion-dollar-boys-sensational-new-kuwait-exclusive/.

⁹³ Tara Francis Chan, “A Day Before His Arrest, Malaysia’s Former Prime Minister Swore That $680 Million Found in His Bank Account Is Actually a Donation From Saudi Arabia,” Business Insider, July 3, 2018, https://www.businessinsider.com/malaysian-former-prime-minister-najib-razak-claims-missing-millions-donations-2018-7.

⁹⁴ Melissa Zhu, “Najib Razak: Malaysia's Ex-PM Starts Jail Term After Final Appeal Fails,” BBC, August 23, 2022, https://www.bbc.com/news/world-asia-62642643.

⁹⁵ Patricia Hurtado, “Jho Low Stole $1.42 Billion From Goldman 1MDB Deals, FBI Agent Says,” Bloomberg, March 14, 2022, https://www.bloomberg.com/news/articles/2022-03-14/jho-low-stole-1-42-billion-from-goldman-1mdb-deals-agent-says.

⁹⁶ Rahmat Khairulrijal, “Lawyers for Jho Low Associate Jasmine Loo Say She Will ‘Reveal the Facts’,” New Straits Ties, July 13, 2023, https://www.nst.com.my/news/crime-courts/2023/07/930590/lawyers-jho-low-associate-jasmine-loo-say-she-will-reveal-facts.

⁹⁷ Mary Ann Jolley, “How 1MDB Fugitive Jho Low Tried to Bargain for His Freedom,” Al Jazeera, accessed July 6, 2022, https://www.aljazeera.com/features/2020/11/16/how-1mdb-fugitive-jho-low-tried-to-bargain-for-his-freedom.

⁹⁸ Hurtado, “Jho Low Stole $1.42 Billion From Goldman 1MDB Deals, FBI Agent Says.”

⁹⁹ Hurtado, “Jho Low Stole $1.42 Billion From Goldman 1MDB Deals, FBI Agent Says.”

¹⁰⁰ Hurtado, “Jho Low Stole $1.42 Billion From Goldman 1MDB Deals, FBI Agent Says.”

¹⁰¹ Hurtado, “Jho Low Stole $1.42 Billion From Goldman 1MDB Deals, FBI Agent Says.”

¹⁰² Matthew Goldstein, “Former Goldman Banker Gets 10 Years in Prison in 1MDB Scandal,” New York Times, March 9, 2023, https://www.nytimes.com/2023/03/09/business/roger-ng-goldman-sachs-1mdb-sentenced.html; Jacob Bogage, “Goldman Sachs Fined Record $2.9 Billion to Resolve 1MDB Bribery Scheme,” Washington Post, October 22, 2020, https://www.washingtonpost.com/business/2020/10/22/goldman-sachs-1mdb-record-fine.

In 2014, Angola’s sovereign wealth fund (SWF), the Fundo Soberano de Angola (FSDEA), was considered largely in compliance with the Santiago Principles—the gold standard for SWF governance as laid out in chapters 1 and 2. The fund had achieved a forty-two-point jump in three years on the Peterson Institute’s SWF Scorecard and received a remarkable 8 out of 10 on the Sovereign Wealth Fund Institute’s Linaburg-Maduell Transparency Index. But it was later revealed that while the FSDEA was receiving such positive ratings, it was also involved in corrupt activities. The head of the FSDEA, who was also the president’s son, had contracted management of the fund’s investments to a business partner. In turn, the business partner invested the funds in companies where the partner himself had an interest.¹

The case of the FSDEA highlights the inadequacy of current standards for evaluating transparency and overall good governance of SWFs, as described in chapters 1, 2, and 12. It also sheds light on the need for independent, third-party auditing and reporting of SWFs.

This case also illustrates how funds with reputations for corruption can be reformed. After the FSDEA scandal broke and the perpetrators were brought to trial, the Angolan government implemented several reforms, which put the FSDEA on a more solid footing. While there is a long way to go for the fund to fully comply with the highest standards of good governance, the current reforms should be applauded. At the same time, the implementation of more credible external evaluation standards could highlight Angola’s reform shortcomings. It could also improve public transparency, which could help push even greater reforms throughout the SWF industry.

What Went Wrong With the FSDEA

Angola established the FSDEA in 2012 with an initial investment from a prior Angolan SWF of $5 billion,² the only cash infusion it has ever received.³ The fund’s goal was “to promote growth, prosperity, and social and economic development.”⁴ That year, Angola’s president, José Eduardo dos Santos, appointed his son, José Filomeno dos Santos (also known as Zenu), as the chairman of the board of the FSDEA.⁵ Zenu contracted a firm called Quantum Capital that belonged to his friend Jean-Claude Bastos de Morais to manage the FSDEA’s capital.⁶

Files leaked from the Appleby law firm as part of the so-called Paradise Papers in 2017 revealed that Bastos invested hundreds of millions of dollars in his own companies, in addition to his firm Quantum Global receiving $90 million over a twenty-month period in 2014 and 2015 to manage the FSDEA.⁷ The company, which also managed funds for the Angolan central bank, received the FSDEA contract without a competitive tender.⁸ Separately, when he was appointed chairman of the FSDEA, Zenu resigned from his role as a director at an investment bank owned by Bastos, Banco Kwanza Invest, and sold his shares, which itself is not corrupt but could be a red flag for conflict of interest.⁹

Media stories based on the Paradise Papers alleged that Appleby set up seven offshore entities in Mauritius that were used by Quantum Global to invest Angolan funds. In four of those entities, Bastos was a major shareholder. In one case, as part of an investment in a five-star hotel in Angola, Quantum Global assumed debt and made cash payments worth $157 million to two firms, but the beneficial owner of both firms was Bastos.¹⁰ In another case, the FSDEA invested in a deepwater port in Angola that was being built by Bastos’s company.¹¹

This was hardly the first corruption scandal associated with Angola and the dos Santos government. A complex series of swaps of promissory notes for Angolan debts to Russia handled by Swiss bank UBS in the late 1990s and early 2000s allegedly netted then president dos Santos $36 million and a former Angolan ambassador $17.5 million, while the Angolan treasury paid $1.78 billion on a debt of $1.5 billion.¹² As part of scandals in 2010 and 2011, the state-owned oil company, Sonangol, required firms to subcontract with local entities linked to the government’s inner circle to receive oil-related contracts.¹³ In 2020, a leak of documents accused the Angolan president’s daughter, Isabel dos Santos (whom the president appointed to take over Sonangol in 2016), of looting the oil company and corruptly creating a business empire in diamonds, telecoms, banks, and the country’s biggest cement maker. Despite an INTERPOL red notice being issued for her arrest in November 2022, she continued to live in Dubai as of February 2023 and has claimed the investigations are a “witch hunt.”¹⁴

Initiation of Reforms

In early 2018, the new president of Angola, João Lourenço (who had previously been dos Santos’s defense minister before becoming president in 2017),¹⁵ fired Zenu from the FSDEA’s board.¹⁶ In July 2019, the government issued a new legal framework for the fund via presidential decrees to establish “an organizational model of sound governance, with clear and effective division of functions and responsibilities, compatible with the nature of [its] activities.”¹⁷ The decrees stated that the FSDEA would maintain its role as a savings and development fund, but a new fund would be established for stabilizing the economy.¹⁸ The decrees also strengthened the criteria for selecting board members and members of other FSDEA governing bodies, better specified the responsibilities of the fund’s various governing bodies,¹⁹ and boosted the required qualifications for asset managers. In addition, the decrees improved risk management of investments and changed the allocations of the fund’s assets.²⁰

As the FSDEA management was being overhauled and new governance measures instituted, Angolan prosecutors charged Zenu in 2018 in a separate incident of attempting to steal $500 million (though the Angolan Ministry of Finance later determined that those involved in the scheme had planned to eventually transfer $1.5 billion) by creating a fake $35 billion investment fund and fake paperwork to justify the large transfer of funds from the Angolan treasury.²¹ Both Zenu and Bastos were arrested later that year.²² The Angolan government alleged that as Zenu’s father was stepping down as president in 2017, Zenu and collaborators created a fake $35 billion investment fund. Using that fake fund, they allegedly arranged to send $500 million from a government account to a shell company’s private bank account held by a collaborator at HSBC in London.²³ Forged documents, including some claiming to be from Credit Suisse, were also reportedly used.²⁴ Though the transfer to the bank went through, a teller filed a suspicious activity report and the Angolan government began to investigate.²⁵ After this scandal, Swiss and British authorities also raided associated offices, froze bank accounts, and opened their own investigations into Bastos’s companies associated with the FSDEA.²⁶

In 2019, there was a confidential agreement between the FSDEA and Bastos’s firm whereby the Angolan government claimed it had recovered from Bastos’s firm $3 billion associated with the FSDEA investments. At that time, Swiss and British authorities dropped their cases and the Angolan government dropped the charges against Zenu related to the fund.²⁷ In 2020, Zenu was convicted of fraud in Angola (but was acquitted of money laundering charges) for the $500 million fraudulent transfer and sentenced to five years in prison, though he remains free on bail and maintains his innocence.²⁸

The Context of the FSDEA Scandals

Dos Santos served as head of state for decades and, though Angola calls itself a democracy, ruled as an authoritarian. Freedom House rated Angola “not free” in its Freedom in the World 2023 report.²⁹ Per Angolan law, the president is not directly elected; they are the candidate of the party or coalition that wins an election. Human Rights Watch notes that while voting has largely been peaceful in Angola, there are severe restrictions on voting and freedom of assembly and significant state censorship, with ruling party officials controlling private media outlets.³⁰ The state controls all nationwide media.³¹

Since independence, Angola has appeared to have rapid economic growth on paper, but in reality there existed a tiny, very wealthy elite amid a sea of poverty. When dos Santos took over as Angola’s second president in 1979, the country produced 146,000 barrels of oil per day.³² The end of the country’s civil war in 2002, in conjunction with new offshore discoveries in the 1990s, allowed oil production to more than double.³³ By 2008, Angola was producing 1.9 million barrels per day.³⁴ Today, the country’s real gross domestic product (GDP) per capita is $5,900³⁵ and its Gini coefficient (which measures income inequality) is 51.3, making it the ninth-most unequal country in the world.³⁶ A third of the population lives below the poverty line, youth unemployment is almost 20 percent, 70 percent of the population is literate, and the country has almost no economic growth.³⁷ Life expectancy is only sixty-two years.³⁸ Only half the population has electricity and a third has internet access.³⁹

One of the ironies of the scandals associated with the FSDEA is that they occurred while the fund was undergoing significant reforms in governance and transparency, at least on paper. In 2012, Angola scored 15 out of 100 on the SWF Scorecard (the first year the FSDEA was scored), making it the third-worst-scoring fund on the index that year.⁴⁰ But by 2015, it had achieved a score of 67, putting it in the middle of the SWFs that were ranked.⁴¹ Moreover, in 2014, the fund was rated for the first time by the Sovereign Wealth Fund Institute and earned an 8 out of 10 on its Linaburg-Maduell Transparency Index.⁴² This rating put Angola in the top thirty of eighty rated SWFs and behind only Nigeria for African funds.⁴³ The media leaks and associated investigations and trials that emerged three years after Angola received these high scores would demonstrate that these scores likely had not been warranted.

Yet even at that time, there were warning signs that something was amiss. First, the Linaburg-Maduell Transparency Index is based primarily on self-reporting by the funds rather than information from an independent third party.⁴⁴ The Economist Intelligence Unit (EIU), the risk analysis and research arm of the Economist Group, pointed out a number of concerns in 2015, including that Bastos was a close business associate of Zenu and that he had previously held part ownership of Angola’s first investment bank, Banco Kwanza Invest.⁴⁵ Regarding the FSDEA’s public transparency, the EIU noted, “The fund’s website, although better than most linked to Angolan government institutions, is not particularly detailed, and while the FSDEA announced in 2014 that its accounts had been audited, it has to date only published basic details of the fund’s transactions and not shared a photocopy of the accounts signed by its auditor, Deloitte.”⁴⁶ In response to a 2014 report by the International Monetary Fund (IMF) that stated that the FSDEA was falling short on transparency, Zenu noted that the fund was submitting detailed quarterly reports to Parliament and that the fund was independently audited.⁴⁷

Some Signs of Improvement

Nonetheless, there have been some signs of improvement for Angola overall and for the governance of its SWF. The Rule of Law Index noted that Angola moved from a score of 0.41 in 2019 to 0.43 in 2022 (on a scale of 0 to 1, where a 1 indicates perfect levels of rule of law).⁴⁸ Its Corruption Perceptions Index score rose fourteen points to 33 (out of a possible 100) between 2018 and 2022.⁴⁹ As the U.S. State Department noted in its most recent investment climate assessment of Angola, “Despite its reputation as a challenging place to do business, Angola is seeking to improve its investment climate and improve in the areas of anti-corruption, democracy, governance, and human rights.”⁵⁰ Angola joined the Extractive Industry Transparency Initiative in June 2022, which should help to increase transparency in its oil, gas, and mining sectors.⁵¹

Moreover, though Lourenço won a second term in 2022, his party won with only 51.4 percent of the vote.⁵² A stronger opposition party and the loss of the ruling party’s supermajority may lead to additional governmental accountability in Parliament, though the election process itself was described as “dodgy” by the Economist, with speculation that Lourenço’s party may have actually lost to the opposition.⁵³

The SWF reforms started in 2019 also seem to be taking root. For instance, the FSDEA’s SWF Scorecard score from the Peterson Institute rose another ten points since 2015 and is now at 77 out of 100, tying it with Australia’s NSW Generations Fund, Spain’s COFIDES, and the state of Texas’ Permanent University Fund.⁵⁴

These are all positive starts, though Angola has a way to go to improve governance overall. While a 2019 report by the IMF lauded the SWF reforms, it also made a significant number of recommendations to align the FSDEA with international good SWF practices. These included more clearly defining the FSDEA’s development function and further clarifying its investment guidelines.⁵⁵ The IMF also recommended that Chile and Norway may be good examples of a well-designed fiscal framework for the fund.⁵⁶ Given that Angola is a highly indebted commodity exporter, the IMF suggested that the fund be used to reduce the country’s expensive external debt before it transfers funds to a short-term stabilization fund; once funds are transferred to the stabilization fund, these transfers should be according to predetermined rules.⁵⁷

Although the new FSDEA governance rules provide for a more varied series of governing boards, more diverse and independent management and advisory committees that include participation by independent and nongovernmental experts would help it meet the Santiago Principles requirements on the independence of SWF operational management and public disclosure of the governance framework.⁵⁸ The IMF further noted that FSDEA’s investment policy would be improved if there were clearer guidelines for investments or perhaps even a prohibition on domestic investments. And while the IMF said that the FSDEA publishes its audited annual reports online and provides more robust regular reports to the Ministry of Finance, the IMF asserted that these more robust reports should also be available to the public, along with the laws and regulations associated with the fund’s governance, investment, and risk management strategies. Independent advisory or oversight bodies should also publish public opinions on the FSDEA’s operations and performance.⁵⁹

Angola has made some commendable progress on SWF governance. This case demonstrates that even highly authoritarian and fragile states can make meaningful reforms. It highlights both the need for reforms in the standards by which SWF governance is judged and how important the implementation of those reforms can be to the citizens of the SWF originating state.

Notes

¹ 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.

² “Angola: Second Review of the Extended Arrangement Under the Extended Fund Facility, Requests for a Waiver of Nonobservance of Performance Criteria, Modifications of Performance Criteria, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Angola,” International Monetary Fund, December 19, 2019, 43, https://www.elibrary.imf.org/view/journals/002/2019/371/article-A000-en.xml.

³ “Angola: Second Review of the Extended Arrangement Under the Extended Fund Facility,” International Monetary Fund, 43.

⁴ “Angola: Second Review of the Extended Arrangement Under the Extended Fund Facility,” International Monetary Fund, 43.

⁵ Alexandra Gillies, Crude Intentions: How Oil Corruption Contaminates the World (New York, NY: Oxford University Press, 2020), 102.

⁶ “Angola’s SWF Receives Transparency Rating,” Economist Intelligence Unit, February 17, 2015, https://country.eiu.com/article.aspx?articleid=782842462&pid=53077589.

⁷ 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; Anna Meisel and David Grossman, “Paradise Papers: Tycoon Made $41m From ‘People’s Fund’,” BBC, November 7, 2017, https://www.bbc.com/news/world-africa-41906123; and Gillies, Crude Intentions, 103.

⁸ Pegg, “Head of Angola’s Wealth Fund Fired After Paradise Papers Revelations.”

⁹ Pegg, “Head of Angola’s Wealth Fund Fired After Paradise Papers Revelations”; and “Angola’s SWF Receives Transparency Rating,” Economist Intelligence Unit.

¹⁰ Pegg, “Head of Angola’s Wealth Fund Fired After Paradise Papers Revelations.” At the time, Bastos told the Guardian in response to this article: “We do not view these investments as conflicted. We view these investments as having aligned interests. All shareholders’ interests are aligned for the growth and ultimate success of every investment.” Appleby did not comment on the article but sued the BBC and the Guardian over their reporting on the Paradise Papers.

¹¹ Gillies, Crude Intentions, 103; and “Angola: Second Review of the Extended Arrangement Under the Extended Fund Facility,” International Monetary Fund, 43.

¹² Mujtaba Ali, “Millions Pocketed in Corrupt Angola Debt Deal,” Organized Crime and Corruption Reporting Project, April 17, 2013, https://www.occrp.org/en/investigations/1934-russia-angola-debt-deal.

¹³ Gillies, Crude Intentions, 46–48, 127.

¹⁴ Alan Cowell, “José Eduardo Dos Santos, Longtime Angolan Ruler, Dies at 79,” New York Times, July 8, 2022, https://www.nytimes.com/2022/07/08/world/africa/jose-eduardo-dos-santos-dead.html; and Miguel Ramalho, “Wanted by Interpol, Relaxing in Dubai: Geolocating Isabel Dos Santos’ Life of Luxury,” bellingcat, February 3, 2023, https://www.bellingcat.com/news/2023/02/03/wanted-by-interpol-relaxing-in-dubai-geolocating-isabel-dos-santos-life-of-luxury/.

¹⁵ Lourenço has had at least one brush with potential corruption as he prepared to take office. Lourenço worked with Elliott Broidy, the vice chairman of the finance committee for the 2017 inauguration of U.S. president Donald Trump, to receive an invitation to inauguration events. Per leaked documents, the Angolan government, through Lourenço, paid Broidy via his Circinus private security company. With the invitation for the inauguration was also a contract for Circinus for a project in Angola. The same day, $6 million was paid by Angola to Circinus and Lourenço met with senators Tom Cotton and Ron Johnson in meetings arranged by Broidy. The meeting also included two Angolan executives from Angolan oil services company Grupo Simples, a company that Broidy had been developing a deal with since 2015, though the deal eventually fell through. Broidy pled guilty in 2020 in the United States for conspiring to violate the Foreign Agents Registration Act but was pardoned shortly after by Trump. See Kenneth P. Vogel and David D. Kirkpatrick, “Fund-Raiser Held Out Access to Trump as a Prize for Prospective Clients,” New York Times, March 25, 2018, https://www.nytimes.com/2018/03/25/us/politics/elliott-broidy-trump-access-circinus-lobbying.html; Paul Duggan, “GOP Fundraiser Says He Got Millions to Illegally Lobby Trump Administration,” Washington Post, April 5, 2023, https://www.washingtonpost.com/dc-md-va/2023/04/04/broidy-testify-trump-malaysia-fugees/; and David Corn, “Disgraced Trump Fundraiser Tried to Use GOP Contacts to Score ‘Billions’ in Africa,” Mother Jones, December 2018, https://www.motherjones.com/politics/2018/12/disgraced-trump-fundraiser-elliott-broidy-tried-to-use-gop-contacts-to-score-billions-in-africa/.

¹⁶ Pegg, “Head of Angola’s Wealth Fund Fired After Paradise Papers Revelations.”

¹⁷ As quoted in “Angola: Second Review of the Extended Arrangement Under the Extended Fund Facility,” International Monetary Fund, 44.

¹⁸ “Angola: Second Review of the Extended Arrangement Under the Extended Fund Facility,” International Monetary Fund, 44.

¹⁹ “Angola: Second Review of the Extended Arrangement Under the Extended Fund Facility,” International Monetary Fund, 44.

²⁰ “Angola: Second Review of the Extended Arrangement Under the Extended Fund Facility,” International Monetary Fund, 44–45.

²¹ Gillies, Crude Intentions, 103; and Stephen Eisenhammer, “Alleged Angolan Fraud Scheme Aimed to Take $1.5 Billion—Finance Ministry,” Reuters, April 9, 2018, https://www.reuters.com/article/idUSKBN1HG2NG.

²² Gillies, Crude Intentions, 103.

²³ Gillies, Crude Intentions, 103–104.

²⁴ Gillies, Crude Intentions, 104; and Margot Patrick, Gabriele Steinhauser, and Patricia Kowsmann, “The $500 Million Central Bank Heist—and How It Was Foiled,” Wall Street Journal, October 3, 2018, https://www.wsj.com/articles/the-500-million-central-bank-heistand-how-it-was-foiled-1538578897.

²⁵ Gillies, Crude Intentions, 104.

²⁶ Gillies, Crude Intentions, 104.

²⁷ Gillies, Crude Intentions, 104; and Candido Mendes, “Angola Says It Recovers $3.35 Billion of Assets From Quantum,” Bloomberg, March 23, 2019, https://www.bnnbloomberg.ca/angola-says-it-recovers-3-35-billion-of-assets-from-quantum-1.1233521.

²⁸ “José Filomeno Dos Santos: Son of Angola’s Ex-Leader Jailed for Five Years,” BBC, August 14, 2020, https://www.bbc.com/news/world-africa-53774288; Cowell, “José Eduardo Dos Santos, Longtime Angolan Ruler, Dies at 79”; AFP, “Angola Sentences Ex-President’s Son to Five-Year Jail for Fraud,” Al Jazeera, August 14, 2020, https://www.aljazeera.com/news/2020/8/14/angola-sentences-ex-presidents-son-to-five-year-jail-for-fraud; and Manuel José, “Analistas e juristas divergem sobre afirmação de Zenu dos Santos de que foi condenado por ser filho do antigo PR,” Voice of America, February 16, 2023, https://www.voaportugues.com/a/analistas-e-juristas-divergem-sobre-afirmação-de-zenu-dos-santos-de-que-foi-condenado-por-ser-filho-do-antigo-pr/6966259.html.

²⁹ “Countries and Territories,” Freedom House, accessed September 8, 2023, https://freedomhouse.org/countries/freedom-world/scores.

³⁰ “Angola,” Human Rights Watch, accessed September 9, 2023, https://www.hrw.org/africa/angola.

³¹ “Angola,” CIA World Factbook, accessed September 5, 2023, https://www.cia.gov/the-world-factbook/countries/angola/.

³² Gillies, Crude Intentions, 108.

³³ Gillies, Crude Intentions, 117.

³⁴ Gillies, Crude Intentions, 108.

³⁵ “Angola,” CIA World Factbook.

³⁶ “Angola,” CIA World Factbook.

³⁷ “Angola,” CIA World Factbook.

³⁸ “Angola,” CIA World Factbook.

³⁹ “Angola,” CIA World Factbook.

⁴⁰ Allie E. Bagnall and Edwin M. Truman, “Progress on Sovereign Wealth Fund Transparency and Accountability: An Updated SWF Scoreboard,” Peterson Institute for International Economics Policy Brief, August 2013, 6, https://www.piie.com/publications/policy-briefs/progress-sovereign-wealth-fund-transparency-and-accountability-updated.

⁴¹ Sarah E. Stone and Edwin M. Truman, “Uneven Progress on Sovereign Wealth Fund Transparency and Accountability,” Peterson Institute for International Economics Policy Brief, October 2016, 6, https://www.piie.com/sites/default/files/documents/pb16-18.pdf.

⁴² “Angola’s SWF Receives Transparency Rating,” Economist Intelligence Unit.

⁴³ “Angola’s SWF Receives Transparency Rating,” Economist Intelligence Unit.

⁴⁴ “Angola’s SWF Receives Transparency Rating,” Economist Intelligence Unit.

⁴⁵ “Angola’s SWF Receives Transparency Rating,” Economist Intelligence Unit.

⁴⁶ “Angola’s SWF Receives Transparency Rating,” Economist Intelligence Unit.

⁴⁷ Shrikesh Laxmidas, “Angolan Wealth Fund Buys Fixed Income but No Project Investments Yet,” Reuters, April 9, 2014, https://www.reuters.com/article/us-angola-fund-idUSBREA3819220140409.

⁴⁸ “WJP Rule of Law Index,” World Justice Project, accessed September 9, 2023, https://worldjusticeproject.org/rule-of-law-index.

⁴⁹ “2022 Corruption Perceptions Index,” Transparency International, January 31, 2023, https://www.transparency.org/en/cpi/2022.

⁵⁰ “2023 Investment Climate Statements: Angola,” U.S. Department of State, accessed November 17, 2023, https://www.state.gov/reports/2023-investment-climate-statements/angola/.

⁵¹ “2023 Investment Climate Statements: Angola,” U.S. Department of State.

⁵² Catarina Demony and Tim Cocks, “Joao Lourenco, Who Surprised Angola With Corruption Crackdown, Gets 2nd Term,” Reuters, August 29, 2022, https://www.reuters.com/world/africa/joao-lourenco-who-surprised-angola-with-corruption-crackdown-gets-2nd-term-2022-08-29/.

⁵³ “An Unofficial Tally Exposes Angola’s Dodgy Election,” Economist, September 8, 2022, https://www.economist.com/middle-east-and-africa/2022/09/08/an-unofficial-tally-exposes-angolas-dodgy-election.

⁵⁴ 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, 3–4, https://www.piie.com/sites/default/files/documents/pb21-3.pdf.

⁵⁵ “Angola: Second Review of the Extended Arrangement Under the Extended Fund Facility,” International Monetary Fund, 45.

⁵⁶ “Angola: Second Review of the Extended Arrangement Under the Extended Fund Facility,” International Monetary Fund, 45. Nematullah Ahmadi, “Raghistan Gold Mine Second Biggest Funding Source For Taliban,” TOLO News, October 22, 2016, https://tolonews.com/afghanistan/27939-raghistan-gold-mine-second-biggest-funding-source-for-taliban.

⁵⁷ “Angola: Second Review of the Extended Arrangement Under the Extended Fund Facility,” International Monetary Fund, 46.

⁵⁸ “Angola: Second Review of the Extended Arrangement Under the Extended Fund Facility,” International Monetary Fund, 46.

⁵⁹ “Angola: Second Review of the Extended Arrangement Under the Extended Fund Facility,” International Monetary Fund, 46–47.

Equatorial Guinea’s opportunity to profit from its hydrocarbon revenues is running out.¹ The International Monetary Fund (IMF) reported in 2018 that by 2030 Equatorial Guinea’s oil fields—which make up the bulk of its export earnings—will be exhausted, though its gas revenues will remain until 2075.² A well-managed sovereign wealth fund (SWF) could thus be an important institution for ensuring that the country’s natural resource wealth benefits future generations and is not squandered.

However, the country’s Fund for Future Generations (FFG) is considered one of the least transparent SWFs in the world. The U.S. State Department’s 2023 assessment of Equatorial Guinea’s investment climate noted that “there is no publicly available information on [the FFG’s] allocations or the regulations directing its maintenance and management.”³ The extraordinary lack of transparency associated with the FFG, combined with the country’s well-documented lack of good governance and high levels of corruption, could mean that average citizens may see few benefits from those natural resources in the future.

Natural gas in Equatorial Guinea was discovered in 1983 and production began in 1992; oil production started in 1996.⁴ The FFG, established in 2002, has an estimated $165 million in assets under management,⁵ and at inception the fund promised to deposit 0.5 percent of annual oil revenues into a special account at the central bank, the Banques des États de l’Afrique Centrale (BEAC).⁶ In 2008, the World Bank confirmed that the government had been putting money into the account, but as early as 2005 the IMF voiced concerns that the fiscal rules of the FFG were unclear and poorly observed.⁷ Moreover, while 0.5 percent is a good start, it is much smaller than the percentage deposited by other oil-rich countries, such as Kuwait, which puts 10 percent of its oil revenues in its SWF.⁸

The Unseen SWF

Today, there is almost no information available on the FFG. It is not a member of the International Forum of Sovereign Wealth Funds (IFSWF),⁹ and the 2019 SWF Report Card (the latest year available) gave Equatorial Guinea the lowest score of all countries: 11 out of 100.¹⁰ The assessors could not find any recent report on the fund’s performance.¹¹ The IMF releases numbers on the BEAC, but it does not break out specific numbers for the FFG.¹² Nonetheless, the IMF reports that Equatorial Guinea had a negative balance on its net foreign assets even when the government was bringing in higher hydrocarbon earnings,¹³ as the Equatorial Guinean government’s funds at BEAC have been drawn down to support government spending.¹⁴ This is a red flag that the FFG may not be fully funded.

The lack of transparency combines with well-documented corruption associated with the governing family and overall poor governance within Equatorial Guinea. As the IMF noted, “The [country’s] existing anti-corruption institutions are assessed to be highly vulnerable to political interference, have limited resources and some have not been established as prescribed by law.”¹⁵ The 2021 Open Budget Survey—which measures participation, oversight, and transparency of national budgets—gave Equatorial Guinea a score of 0 out of 100 for its public participation and budget transparency and an 18 out of 100 on budgetary oversight.¹⁶ Transparency International gave the country a 17 out of 100 in its 2022 Corruption Perceptions Index.¹⁷

Evidence of Grand Corruption in Equatorial Guinea

This chapter does not allege that there has been any wrongdoing associated with Equatorial Guinea’s SWF, but the government’s well-documented history of grand corruption points to a need for greater scrutiny and accountability for the SWF to ensure that funds are not diverted for personal gain.

Officially a democracy, Equatorial Guinea is governed by the Obiang family. Teodoro Obiang Nguema Mbasogo has been president since 1979, when he seized power in a military coup.¹⁸ The country is rated “not free” by Freedom House and received a score of 0 for political rights in 2023.¹⁹

The president’s eldest son, Teodoro Nguema Obiang Mangue (referred to here by his surname Nguema²⁰) has been the first vice president since November 2022.²¹ Before his promotion, he served as the forestry minister. The U.S. Department of Justice (DOJ) estimated that between 2005 and 2007, Ngeuma funneled into the United States at least $75 million, which was almost half of the annual education budget in Equatorial Guinea.²² In 2014, the DOJ seized over $30 million in his assets, including two mansions, a private jet, luxury vehicles, and various Michael Jackson memorabilia (including seven life-sized statues of the singer, one of his diamond-studded gloves, and the red jacket worn in the “Thriller” music video).²³ In 2016, Switzerland seized eleven luxury cars worth $8 million and a $120 million superyacht from Nguema.²⁴ In 2018, Brazilian police seized $16.5 million in watches and cash.²⁵

Perhaps the most notorious case against Nguema was the decade-long Biens Mal Acquis (“Ill-Gotten Gains”) case, which was resolved in 2021 when France’s highest appeals court upheld the guilty verdict against him. Ngeuma was the first foreign senior official to be tried in a French court of diverting corruptly acquired funds into investments on French territory.²⁶ An estimated $150 million of property was seized—including a French mansion worth $120 million and eleven luxury cars (a Maserati, an Aston Martin, a Rolls Royce, a Porsche, two Bugattis, two Ferraris, and two Bentleys).²⁷ Based on evidence from the French court, the British government also sanctioned Nguema with asset freezes and a travel ban.²⁸ Throughout the trial, the Equatoguinean government asserted that, as vice president, Ngeuma enjoyed immunity from criminal prosecution and it filed legal action against France in the International Court of Justice.²⁹

Another of the president’s sons, Gabriel Mbaga Obiang Lima (commonly referred to as Gabriel), is the minister of mines and hydrocarbons. Media reporting by the Organized Crime and Reporting Project (OCCRP)—a global network of investigative journalists—alleged that Gabriel “often extorted money from businesses by demanding payments for events that are already funded by the government” and that companies linked to him “often make money by renting out residences to foreign oil companies or even the government.”³⁰ For instance, the OCCRP report alleged that a contract to create the National Institute of Hydrocarbons massively inflated the institute’s construction costs. Kickbacks allegedly included free renovations and construction work on hotels linked to Gabriel.³¹

Beyond the immediate Obiang family, there have been media reports of repeated scandals involved with the state oil company, GEPetrol. In 2021, the OCCRP, working with the Equatoguinean online news site Diario Rombe, reported that GEPetrol’s managing director, Antonio Oburu Ondo, had used offshore firms to skim profits for himself from oil deals he set up. Part of this emerged via a $339 million oil corruption lawsuit that has been making its way through British and Swiss courts since 2015. The lawsuit claimed that fake companies were inserted into oil cargo sales to skim money.³² Oburu is married to Candida Okomo Nsue Mensa, who is the niece of the first lady of Equatorial Guinea and the daughter of the president’s chief of protocol.³³ Okomo was named the deputy general director of GEPetrol in 2017.³⁴ Oburu and Okomo bought Cypriot citizenship in 2017 for 2.5 million euros ($2.6 million), and they own properties in Limassol, Cyprus; Accra, Ghana; Houston, United States; and Madrid, Spain. Some of these properties were bought via shell companies in the financial secrecy jurisdiction of the British Virgin Islands and using a bank account in Lebanon.³⁵

No Improvements on the Horizon

Under the Obiangs, Equatorial Guinea’s economic development has been phenomenal—on paper. In 1979, Equatorial Guinea had an estimated gross domestic product (GDP) per capita of $170. By 2021, GDP per capita had risen to $14,600,³⁶ after the country experienced an average 23.6 percent real GDP growth rate per year between 1996 and 2008.³⁷ Despite these figures, two-thirds of the population lives below the poverty line, and Equatorial Guinea has the fourth-highest infant mortality rate in the world at 77.85 per 1,000 live births.³⁸ Only 67 percent of the population has electricity, and there are thirty-nine mobile phones per 100 inhabitants (and less than one fixed line phone per 100 inhabitants).³⁹ Perhaps as a result, it had the fifth-highest net migration rate in the world, with thirteen migrants per 1,000 of the population per year.⁴⁰

Investigative journalism by local reporters trying to provide oversight of the FFG, or anything in Equatorial Guinea, has been difficult. Equatorial Guinea has one state-owned TV and radio station, plus a private TV and a private radio station, which are both owned by the president’s eldest son, Nguema.⁴¹ Receiving news from abroad can also be difficult since there are only 1,000 fixed broadband subscriptions in the country and only about half of the population has access to the internet.⁴² Obiang and his associates own the phone and internet companies, allowing them to control what information is shared. Especially during elections—including during the 2022 elections⁴³—or violent government attacks against opposition parties, the regime shuts down access to the internet and/or social media. The government also blocks websites of media and nongovernmental organizations it considers critical of the regime.⁴⁴ The Natural Resource Governance Institute noted that anti-corruption and good governance advocates are regularly targeted for harassment and arbitrary arrest. The judiciary lacks independence and includes such violations of rule of law as mass trials, trumped-up charges, and confessions obtained through torture.⁴⁵

Equatorial Guinea’s economy is not expected to improve soon. As the IMF noted in 2022, “the economy is projected to contract in 2023 and through the medium term, reflecting a reduction in hydrocarbon output together with a stalled structural reform agenda, weak governance and significant corruption vulnerabilities, subdued business confidence, and a weak banking sector.”⁴⁶ The IMF assessed that “hydrocarbon revenues in Equatorial Guinea have passed their peak” and that the country has about $105.6 billion in hydrocarbon wealth remaining.⁴⁷

Although there has not been any documented wrongdoing associated with Equatorial Guinea’s SWF, the Obiang family’s history of authoritarian governance and grand corruption, combined with the lack of transparency in the fund and the anticipated short time line for the country to profit from natural resource revenues, highlights the need for greatly improved governance for the SWF.

Chapter 2 highlighted the lack of transparency in SWFs overall, while chapter 12 asserts the need for countries that receive investments from SWFs to establish guidelines to conduct due diligence on the sources of that money. Though none of the seizures of Obiang property associated with corruption in France, Switzerland, Brazil, and the United States were explicitly linked to the SWF, it nonetheless highlights the importance for recipient countries of requiring such due diligence should a similarly kleptocratic regime seek to move ill-gotten gains through an SWF.

Notes

¹ “Republic of Equatorial Guinea: 2022 Article IV Consultation--Press Release; Staff Report; and Statement by the Executive Director for Republic of Equatorial Guinea,” International Monetary Fund, July 8, 2022, 8, https://www.imf.org/en/Publications/CR/Issues/2022/08/03/Republic-of-Equatorial-Guinea-2022-Article-IV-Consultation-Press-Release-Staff-Report-And-521695.

² “Republic of Equatorial Guinea: First Review Under The Staff-Monitored Program—Press Release; and Staff Report,” International Monetary Fund, November 12, 2018, 37, https://www.elibrary.imf.org/view/journals/002/2018/310/article-A001-en.xml.

³ “2023 Investment Climate Statements: Equatorial Guinea,” U.S. Department of State, accessed September 9, 2023, https://www.state.gov/reports/2023-investment-climate-statements/equatorial-guinea/.

⁴ Antony Goldman, “Poverty and Poor Governance in the Land of Plenty: Assessing an Oil Dividend in Equatorial Guinea,” Center for Global Development, December 2011, 3, https://www.cgdev.org/sites/default/files/archive/doc/Initiatives/Oil2Cash/EG_Goldman_Formatted_Version_Final.pdf.

⁵ “Equatorial Guinea Fonds de Réserves pour Générations Futures (Fund for Future Generations),” Sovereign Wealth Fund Institute, accessed November 15, 2022, https://www.swfinstitute.org/profile/598cdaa50124e9fd2d05b002.

⁶ Goldman, “Poverty and Poor Governance in the Land of Plenty,” 9.

⁷ Goldman, “Poverty and Poor Governance in the Land of Plenty,” 9.

⁸ Goldman, “Poverty and Poor Governance in the Land of Plenty,” 10.

⁹ Confirmed by the author on September 9, 2023, via the IFSWF website: https://www.ifswf.org/our-members. The FFG had been previously associated with the IFSWF. Allie E. Bagnall and Edwin M. Truman, “Progress on Sovereign Wealth Fund Transparency and Accountability: An Updated SWF Scoreboard,” Peterson Institute for International Economics, 2013, 1, https://www.piie.com/publications/policy-briefs/progress-sovereign-wealth-fund-transparency-and-accountability-updated.

¹⁰ Julien Maire, Adnan Mazarei, and Edwin M. Truman, “Sovereign Wealth Funds Are Growing More Slowly, and Governance Issues Remain,” Peterson Institute for International Economics, August 2021, 6, https://www.piie.com/publications/policy-briefs/sovereign-wealth-funds-are-growing-more-slowly-and-governance-issues.

¹¹ Maire, Mazarei, and Truman, “Sovereign Wealth Funds Are Growing More Slowly,” 3, 6.

¹² “Republic of Equatorial Guinea: 2022 Article IV Consultation,” International Monetary Fund, 6.

¹³ “Republic of Equatorial Guinea,” 37.

¹⁴ “Republic of Equatorial Guinea,” 21.

¹⁵ “Republic of Equatorial Guinea,” 72.

¹⁶ “Rankings,” International Budget Partnership, accessed September 8, 2023, https://internationalbudget.org/open-budget-survey/rankings.

¹⁷ “2022 Corruption Perceptions Index,” Transparency International, January 31, 2023, https://www.transparency.org/en/cpi/2022.

¹⁸ “Equatorial Guinea,” CIA World Factbook, accessed September 5, 2023, https://www.cia.gov/the-world-factbook/countries/equatorial-guinea/.

¹⁹ “Countries and Territories,” Freedom House, accessed September 8, 2023, https://freedomhouse.org/countries/freedom-world/scores

²⁰ He is also called Teodorin.

²¹ “Equatorial Guinea,” CIA World Factbook.

²² Goldman, “Poverty and Poor Governance in the Land of Plenty,” 7.

²³ Tutu Alicante, “To Catch a Kleptocrat: Lessons Learned from the Biens Mal Acquis Trials in France,” National Endowment for Democracy, June 2019, 5, https://www.ned.org/wp-content/uploads/2019/06/To-Catch-A-Kleptocrat.pdf.

²⁴ Alicante, “To Catch a Kleptocrat,” 5.

²⁵ Alicante, “To Catch a Kleptocrat,” 5.

²⁶ Alicante, “To Catch a Kleptocrat,” 5–10.

²⁷ Alicante, “To Catch a Kleptocrat,” 5; and Des Sellmeyer, “11 Supercars of Teodoro Obiang Nguema Mbasogo Seized by French Police,” GTspirit, September 29, 2011, https://gtspirit.com/2011/09/29/11-supercars-of-teodoro-obiang-nguema-mbasogo-seized-by-french-police.

²⁸ Alicante, “To Catch a Kleptocrat.”

²⁹ Alicante, “To Catch a Kleptocrat,” 9–10.

³⁰ Delfin Mocache Massoko et al., “Equatorial Guinea’s Oil Minister Allegedly Siphoned Off Millions From Public Construction Project,” OCCRP, January 8, 2021, https://www.occrp.org/en/investigations/equatorial-guineas-oil-minister-allegedly-siphoned-off-millions-from-public-construction-project.

³¹ Massoko et al., “Equatorial Guinea’s Oil Minister Allegedly Siphoned Off Millions.” One of the firms associated with alleged kickbacks, Centurion Law Group, responded to OCCRP by releasing a statement accusing one of the reporters on the story of extortion and saying that the firm would file charges against the reporter; the OCCRP stated that it stands behind its story.

³² Delfin Mocache Massoko, Stelios Orphanides, and Pete Jones, “Petroleum Profits and Expensive Estates: Equatorial Guinea Oil Chief’s Wealth Revealed,” OCCRP, July 15, 2021, https://www.occrp.org/en/investigations/petroleum-profits-and-expensive-estates-equatorial-guinea-oil-chiefs-wealth-revealed.

³³ Massoko, Orphanides, and Jones, “Petroleum Profits and Expensive Estates.”

³⁴ Massoko, Orphanides, and Jones, “Petroleum Profits and Expensive Estates.”

³⁵ Massoko, Orphanides, and Jones, “Petroleum Profits and Expensive Estates.” The same report notes that Oburu had also previously purchased Belize citizenship.

³⁶ “Equatorial Guinea,” CIA World Factbook.

³⁷ Goldman, “Poverty and Poor Governance in the Land of Plenty,” 3.

³⁸ “Equatorial Guinea,” CIA World Factbook.

³⁹ “Equatorial Guinea,” CIA World Factbook.

⁴⁰ “Equatorial Guinea,” CIA World Factbook.

⁴¹ “Equatorial Guinea,” CIA World Factbook.

⁴² “Equatorial Guinea,” CIA World Factbook.

⁴³ “Equatorial Guinea: Authorities Announce Closure of Air Borders Nov. 20-21 Amid Nov. 20 General Elections; Land Borders Closed/Update 2,” Crisis24, November 17, 2022, https://crisis24.garda.com/alerts/2022/11/equatorial-guinea-authorities-announce-closure-of-air-borders-nov-20-21-amid-nov-20-general-elections-land-borders-closed-update-2.

⁴⁴ Alicante, “To Catch a Kleptocrat,” 11.

⁴⁵ “Joint NGO Letter to IMF Executive Board: Delay Vote on Equatorial Guinean Loan,” Natural Resource Governance Institute, November 21, 2019, http://resourcegovernance.org/articles/joint-ngo-letter-imf-executive-board-delay-vote-equatorial-guinean-loan-0.

⁴⁶ “Republic of Equatorial Guinea: 2022 Article IV Consultation,” International Monetary Fund, Key Issues.

⁴⁷ Estimated wealth based on $70 per barrel of crude oil and $110 per barrel of oil equivalent of natural gas. Equatorial Guinea has an estimated 1.1 billion barrels of proven liquid hydrocarbon reserves, plus 0.26 billion barrels of oil equivalent of proven gas reserves in 2020. See “Republic of Equatorial Guinea: 2022 Article IV Consultation,” International Monetary Fund, 54.

In October 2021, the English Premier League (EPL) approved the takeover of Newcastle United Football Club by the Public Investment Fund (PIF) of Saudi Arabia and two other parties. As the PIF acquired 80 percent of the 130-year-old club, it became the majority owner.¹ Within minutes of the announcement of the takeover, thousands of jubilant Newcastle United supporters flooded the streets outside the St James’ Park stadium, celebrating and chanting slogans in support of the new Saudi owners.² Ten days later, a sellout crowd at the first home game under PIF ownership saw many fans don Saudi thobes and Arab headscarves, while human rights advocates protested outside the stadium with images of murdered Saudi columnist Jamal Khashoggi.³

The emphasis placed on soccer (and sport more broadly) by the PIF—and, by extension, the Kingdom of Saudi Arabia—since 2016, coupled with the rapturous nature of their welcome in Newcastle, shines a spotlight on the unconventional returns on such investments. Owning sports clubs overseas does little to generate job creation or technology transfer in the investing country; and professional soccer teams in the EPL have only recorded pre-tax profits four times in the last two decades (the twenty teams collectively lost, pre-tax, nearly £1 billion ($1.3 billion) in the 2019–2020 season alone).⁴ This reality suggests that financial rates of return were not necessarily uppermost in the PIF’s considerations. And, hence, the PIF’s acquisition presents a useful case study of how a sovereign wealth fund can pursue other objectives besides economic diversification and national development.

Moreover, the scale of the PIF’s (and the Saudi state’s) turn toward investment in a range of sports since 2018 indicates that Saudi Arabia will exercise growing influence across the global sporting landscape in ways that are increasingly visible and direct, whether through the ownership of teams and franchises or by hosting global events that position the Kingdom as a destination.⁵ Media reports suggest, for example, that Saudi authorities are aiming to win the hosting rights to twenty-five world championships across a range of sports by 2030, and as the sole bidder, Saudi Arabia is now expected to host the 2034 World Cup, too.⁶ Already, the Kingdom has secured the right to host the 2023 FIFA Club World Cup, the 2027 AFC Asian Cup, and the 2029 Asian Winter Games, with the latter set to take place at Trojena, a futuristic ski resort to be developed as part of the PIF’s Neom giga-project in northwest Saudi Arabia.⁷

No specific links to issues of corruption have emerged in the Public Investment Fund’s nascent foray into the sporting landscape, although questions have been raised about the process of decisionmaking within the PIF and the overspill of political considerations into investment policy.⁸ The proximity of the PIF to Crown Prince Mohammed bin Salman and its central role in the redistribution of political authority in Saudi Arabia since 2015 has ensured that “the PIF’s structure and investment strategy are enmeshed in elite politics” and injected “political drivers” associated with the personal policy preferences of the heir to the throne.⁹ Personalized aspects of decisionmaking, together with the unconventional and frequently intangible returns associated with sports-related investments, may well define and indeed distort the PIF’s mandate as 2030 approaches, especially if progress on developing the giga-projects is perceived to be lagging or underwhelming, and policymakers believe themselves to be under pressure to show results.¹⁰

Emergence of the PIF as the Saudi Sovereign Wealth Fund

When sovereign wealth funds began to attract international attention during the 2007–2008 global financial crisis, it was often noted that Saudi Arabia did not have a sovereign fund, at least by comparison with the externally focused investment authorities in Kuwait, Qatar, and the United Arab Emirates (UAE). According to a 2008 study of Gulf-based sovereign wealth funds, the Saudi Arabian Monetary Agency managed the Kingdom’s assets and the PIF was one of three state funds that invested locally and were not “standard” sovereign wealth funds (in other words, they did not emphasize external investment portfolios or priorities).¹¹ From its formation in 1971 until 2015, when responsibility for its operations was transferred to the Council of Economic and Development Affairs (CEDA), the PIF was part of the Ministry of Finance and maintained a domestic-focused and largely low-key profile.¹²

This changed in March 2015, two months after the succession from King Abdullah to King Salman and the rise to prominence of the new king’s then twenty-nine-year-old son, Mohammed bin Salman. Appointed minister of defense and chairman of CEDA as part of the restructuring of the Saudi cabinet in January 2015, Mohammed bin Salman entered the line of succession in April when his father appointed him deputy crown prince (and, in June 2017, crown prince, displacing his cousin, Mohammed bin Nayef).¹³ He immediately began to accumulate decisionmaking authority on a scale unprecedented in post-1953 Saudi Arabia.¹⁴ He assumed oversight of investment policy in March 2015, when the PIF was transferred from the ministry of finance to CEDA, as well as of energy policy, when he became chairman of a new supreme council for the state-run oil company Saudi Aramco in May 2015, just days after becoming deputy crown prince.¹⁵

In April 2016, Mohammed bin Salman unveiled Vision 2030, an ambitious plan to transform and diversify the Saudi economy, and entrusted the PIF with much of its project delivery, including associated giga-projects such as Neom. In his introduction to Vision 2030, Mohammed bin Salman stated that Saudi Arabia would “transform the Public Investment Fund into the world’s largest sovereign wealth fund,” in part by transferring ownership of Saudi Aramco to the PIF and listing a proportion of its shares.¹⁶ Sport, entertainment, and tourism have all featured heavily in Vision 2030 and the six giga-projects launched by Mohammed bin Salman since 2017. In addition to Neom, these projects include Qiddiya, a large-scale entertainment, sports, and cultural complex near the capital Riyadh, as well as other large-scale developments along the Red Sea coastline.¹⁷

The extent to which Vision 2030 and the giga-projects will be realized is yet to be determined and may not become fully apparent for many years to come. The degree to which Vision 2030 (and PIF investment ventures) can develop and diversify the domestic economic and industrial base and create sufficient new jobs for Saudi citizens as they enter the labor market will be the ultimate test of its success. Media reports in the Wall Street Journal have painted a picture of a less than harmonious working environment that seemingly has impacted Mohammed bin Salman’s initiatives.¹⁸ And yet the PIF remains integral to his plans to remake the Saudi state, both before and after he becomes king, as evidenced by the decision to transfer an additional 4 percent of Saudi Aramco shares, potentially worth some $80 billion, to PIF coffers in April 2023.¹⁹ Moreover, sport has emerged as an area of intense focus for the Saudi authorities, combining domestic and international considerations as well as large-scale and increasing commitment of resources.

Leveraging the Global Appeal of Sport

Under Mohammed bin Salman, Saudi Arabia has become far more active in trying to harness the power of culture and sport to burnish its international image and move the narrative about the Kingdom away from issues such as human rights violations and the war in Yemen. This effort took on added importance after the October 2018 killing of Washington Post journalist Jamal Khashoggi by agents of the Saudi state who acted, according to U.S. intelligence agencies, with the approval of Mohammed bin Salman.²⁰ Some of the initial Saudi engagement with international sport was driven by Turki Al Sheikh, a close adviser to the crown prince, in both his professional capacity as chairman of the General Entertainment Authority and his private capacity as an investor in soccer clubs in Egypt, Spain, and Sudan.²¹

The scope and intensity of Saudi Arabia’s involvement in sporting initiatives, as a host and participant, quickened considerably after 2018. That year, the General Entertainment Authority signed a ten-year agreement with World Wrestling Entertainment to host two “crown jewel” events each year in the Kingdom, and the first one took place only a month after Khashoggi’s death.²² Multiyear agreements were also signed with the Italian and Spanish soccer federations to host each country’s super cup in Saudi Arabia in 2018 and 2019 and in 2020 and 2022 respectively. In addition, major boxing matches took place in the town of Diriyah, the ancestral home of the House of Saud, and the inaugural Saudi Arabian Grand Prix was organized on a street circuit along the Jeddah Corniche in 2021 as part of a ten-year deal with Formula One.²³ The PIF also began to invest significantly in gaming and esports in 2022 through a subsidiary, the Savvy Games Group, established as part of the PIF’s new 2021–2025 strategy to build on a string of previous investments in various esports and gaming platforms and companies.²⁴

The EPL’s global profile and the contentious nature of the Newcastle United takeover process brought Saudi Arabia’s sporting outreach into even greater focus. The lengthy process lasted from April 2020 to October 2021, largely because the EPL sought assurances that the PIF was separate from the Saudi state and that the latter would not have control over the club.²⁵ Proving the separation of the PIF and the Saudi state was a challenge, given that the PIF functioned as the sovereign wealth fund of Saudi Arabia and answered to the crown prince as chairman of the fund’s board. The board itself comprises six members of the Council of Ministers (the Saudi cabinet) and two advisers to the Royal Court.²⁶ Evidence of separation was deemed necessary because the Saudi state was implicated in the pirating of regional broadcasting rights held by beIN Sports, a Qatar-based media group, including the illegal airing of matches from the EPL itself. In June 2020, a ruling by the World Trade Organization (WTO) linked the Kingdom to beoutQ, a shadowy entity that appeared in 2017 during the blockade of Qatar by Saudi Arabia, Bahrain, Egypt, and the UAE.²⁷ The fact that beIN Sports held the rights to broadcast EPL games in the Middle East and North Africa complicated the takeover of Newcastle United, as the WTO ruling established that the Saudi authorities had failed to act against the theft of those rights by an entity or individual operating under Saudi jurisdiction.

An October 2021 decision by Saudi authorities to restore beIN’s access to Saudi Arabia proved to be the key to breaking the impasse over the PIF-led takeover of Newcastle United, which was approved by the EPL the following day.²⁸ The alacrity with which the EPL announced it had received, and accepted, “legally binding assurances” that the Saudi state would not control Newcastle United (without disclosing what those assurances were) seemed to indicate that the real holdup to the takeover had been the piracy issue affecting beIN, the EPL’s regional broadcast partner in the Middle East and North Africa.²⁹ Newcastle United’s fortunes on the field went on to improve markedly, helped by a lavish outlay on new players. Ties between the club and Saudi Arabia also proliferated, evidenced by, for example, a mid-season warm-weather training week in Jeddah and a new jersey that, perhaps not uncoincidentally, resembled that of the Saudi Arabian national team.³⁰

Critics of the Newcastle United acquisition have accused Saudi Arabia of “sports-washing”—a nebulous term that emerged in the 2010s as authoritarian regimes began to actively engage more in the infrastructure and ecosystem of global sport and, in turn, challenge the historically Western-centric dominance of sporting institutions and mega-event hosting.³¹ But it could also be said that governments are engaging in forms of nation branding and soft power projection to reach new audiences and channel narratives in new and (for them) more benign directions. The PIF has played an active role in this phenomenon through its involvement with Newcastle and, since 2022, its financial support of more than $2 billion for a breakaway golf tour, the LIV Golf Invitational Series.³²

Multiple PIF Objectives

PIF leaders have tended to maintain a discreet silence about the decisionmaking process around putting the fund’s broad objectives—spelled out to great fanfare by Mohammed bin Salman—into practice. For example, in announcing the PIF’s new five-year strategy for 2021–2025, the crown prince (and board chairman) declared that the fund would invest $40 billion each year domestically and create 1.8 million new jobs in Saudi Arabia, but he did not provide any specific details. In equally broad terms, PIF governor Yasir bin Othman al-Rumayyan added that the fund’s mandate was to “enable the private sector” in part by working with “innovative, transformative and disruptive companies around the world” to develop “the industries and opportunities of the future.”³³

Some investments in clear support of this mandate include the PIF’s investment of $1 billion in the American electric vehicle manufacturer Lucid Motors in 2019, and the February 2022 announcement that Lucid would open a new assembly plant in Saudi Arabia and provide between 50,000 and 100,000 locally produced electric cars for the Saudi market over a ten-year period.³⁴

Other conventional investments include esports and gaming, in terms of the investments’ compatibility with the mandate to contribute to the economic development and diversification of Saudi Arabia. This emerging and rapidly growing sector appears to be consistent with al-Rumayyan’s earmarking of “innovative, transformative and disruptive” companies and technologies as targets for PIF investments with the goal of establishing leadership in new economic sectors and positioning the Kingdom as a “growth engine.”³⁵ Also consistent is a separate PIF investment made in 2021—the acquisition of a minority stake in the McLaren Group—that was followed in 2022 by a “strategic title partnership” that saw Neom brand itself on McLaren’s Formula E and Extreme E racing cars and saw McLaren become a founding partner in an advanced and clean industries initiative to be based at a Neom research and innovation campus.³⁶

Less conventional or clear, however, are the PIF’s investments in Newcastle United and LIV Golf. These appear to be more about the projection of soft power and the use of sport to reach new constituencies outside the Kingdom’s borders. The global profile and mass appeal of the EPL could make Newcastle United a potent brand for Saudi Arabia, especially if the team performs well and if the jerseys ever feature advertisements for Saudi companies.³⁷ Other indirect benefits may contribute to aspects of Vision 2030, such as the promotion of Saudi Arabia as a tourism destination, an approach seen also in the 2022 unveiling of Argentinian soccer superstar Lionel Messi as a brand ambassador for the Saudi Tourism Authority.³⁸ It is these less tangible (and hard-to-measure) outcomes of PIF investments that have motivated the accusations of “sports-washing”—just as the term has become popularized by events such as the 2022 FIFA World Cup in neighboring Qatar.

The PIF’s decision to associate itself with, and finance, LIV Golf not only reflects al-Rumayyan’s personal interest in golf but also suggests a very different approach to Saudi Arabia’s engagement in sport.³⁹ It is one thing to own one of twenty teams in the EPL or organize one of twenty-two grand prix in the Formula One World Championship but quite another to back a breakaway golf tour that has positioned itself as a direct rival to the existing institutional structure, in this case the Professional Golfers’ Association (PGA) and DP World (European) Tour.⁴⁰ The PIF’s backing of LIV Golf in 2022 and eventual agreement to combine commercial operations with the PGA and DP World Tour in June 2023 represented a striking breakthrough against the status quo in a notoriously conservative sport, consistent with al-Rumayyan’s enthusiasm for disruptive and transformative challengers.⁴¹ The fact that two of the eight tournaments in the inaugural season took place at courses owned by former U.S. president Donald Trump suggests that political motives could potentially be at play. Also seemingly political in nature is the PIF’s decision—reportedly against the advice of its investment committee—to invest $2 billion in Affinity Partners, a private equity firm established by Trump’s son-in-law and former senior adviser, Jared Kushner.⁴²

Speaking to the media after unveiling plans for a smart city called The Line as part of the Neom project in 2022, Mohammed bin Salman asserted that Saudi Arabia would have a population of more than 50 million by 2030.⁴³ The scale of increase (from a current population of 35.96 million in 2023⁴⁴) suggests that a majority of the arrivals will be residents or visitors from overseas. It may be that, over the period leading up to 2030, investment into sport, through ownership, sponsorship, or event hosting, will create awareness of Saudi Arabia (and particularly the giga-projects) as a place to visit or live. Tapping into the mass global appeal of sport could in this way generate, over the long term, development of Saudi Arabia as a market for tourism, entertainment, and hospitality.⁴⁵ Whether this transpires or not will only become clear over years, but the PIF established a dedicated sports investment company (SRJ Sports Investments) in August 2023 as a statement of intent with a mandate to accelerate the growth of the sport sector in Saudi Arabia, localize partnerships, and contribute “to a more vibrant society,” however that may be measured.⁴⁶

Conclusion

PIF and Saudi Arabia may be relatively late entrants into sport, especially by comparison with the states around them, such as Qatar, the UAE (both Dubai and Abu Dhabi), and even Bahrain, which first hosted a Formula One Grand Prix as far back as 2004.⁴⁷ Sovereign wealth funds and the resource-rich states that they represent have become increasingly visible investors and participants in global sport over the past decade. Gulf states’ investments in European soccer teams such as Manchester City (owned since 2008 by the brother of the ruler of Abu Dhabi, also the president of the UAE) and Paris Saint-Germain (owned by Qatar Sports Investments since 2011) have reshaped the playing field and financial landscape and attracted criticism from fans and owners of other clubs. The Union of European Football Associations, the governing body of soccer in Europe, has investigated both Manchester City and Paris Saint-Germain for alleged breaches of financial fair play rules, suggesting that the clubs may have benefited from inflated sponsorship contracts with state-linked entities.⁴⁸ The trend of sovereign wealth investment looks set to grow in tandem with the globalization of sport and the rebalancing of the sporting landscape beyond the traditional powerhouses of Europe and North America, and with the levels of resources now put forward by the PIF. Further study of the engagement of sovereign wealth funds in global sport is therefore important to shed light on possible motivations or objectives that seem to align with profit maximization or national development and diversification.

Notes

¹ In addition to the 80 percent stake acquired by the PIF in Newcastle United Limited and Newcastle United Football Club Limited, PCP Capital Partners (led by Amanda Staveley) and RB Sports & Media (led by David and Simon Reuben) each took 10 percent stakes. Yasir bin Othman al-Rumayyan, the PIF governor (and chairman of Saudi Aramco) became the nonexecutive chairman of Newcastle United upon the completion of the deal on October 7, 2021. The price paid for Newcastle was listed as £305 million ($409 million). Jeff Tracy, “Newcastle United Sold to Saudi Wealth Fund,” Axios, October 8, 2021, https://www.axios.com/2021/10/08/newcastle-sold-saudi-wealth-fund-premier-league.

² “Newcastle United Takeover: Joyous Scenes as Fans Celebrate New Era,” BBC News, October 8, 2021, https://www.bbc.com/news/uk-england-tyne-58841152.

³ Samuel Meade, “Protestors Against Newcastle Takeover Unveil Jamal Khashoggi Billboard at St James’ Park,” Daily Mirror, October 18, 2021, https://www.mirror.co.uk/sport/football/news/newcastle-owners-protests-jamal-khashoggi-25238858.

⁴ Samuel Agini, “English Premier League’s Top Clubs Post Biggest Collective Loss in History,” Financial Times, June 14, 2021, https://www.ft.com/content/93ad309a-a02f-4ba9-8b38-8e694cbdc2cc. Given that the value of Chelsea Football Club rose from £140 million ($225 million) when it was acquired by Roman Abramovich in 2003 to £2.5 billion ($3.1 billion) when it was sold to a U.S.-led consortium in 2022, investors such as the PIF may realize value from an appreciating asset at a later point in time. See “Sale of Sanctioned Oligarch’s Chelsea Football Club Approved by U.K. Government,” Associated Press, May 25, 2022, https://www.npr.org/2022/05/25/1101141199/sale-of-sanctioned-oligarchs-chelsea-football-club-approved-by-u-k-government.

⁵ Simon Chadwick and Paul Widdop, “Playing for Power: A Deep Dive into Saudi Arabia’s Global Sports Ambitions,” Near East Policy Forum, July 20, 2023, https://nepf.org.au/index.php/playing-for-power-a-deep-dive-into-saudi-arabias-global-sports-ambitions/.

⁶ Jacob Whitehead and Stuart James, “Saudi Arabia, Football’s Big Disruptors. The Story of the Money, the Motive and the Hidden Disputes,” Athletic, June 11, 2023, https://theathletic.com/4600483/2023/06/12/saudi-benzema-kante-transfers; and Tariq Panja, “Saudi Arabia Confirmed as Sole Bidder for 2034 World Cup,” New York Times, October 31, 2023, https://www.nytimes.com/2023/10/31/world/middleeast/saudi-arabia-world-cup-2034.html.

⁷ “Saudi Arabia to Host the 2029 Asian Winter Games at NEOM,” Arab News, October 5, 2022, https://www.arabnews.com/node/2174656/sport.

⁸ David 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.

⁹ Alexis Montambault Trudelle, “The Public Investment Fund and Salman’s State: The Political Drivers of Sovereign Wealth Management in Saudi Arabia,” Review of International Political Economy 30, no. 2 (May 2022), 2–3, https://www.tandfonline.com/doi/full/10.1080/09692290.2022.2069143.

¹⁰ Oliver McPherson-Smith, “Diversification, Khashoggi, and Saudi Arabia’s Public Investment Fund,” Global Policy 12, no. 2 (2021), 194–195.

¹¹ Jean-Francois Seznec, “The Gulf Sovereign Wealth Funds: Myths and Reality,” Middle East Policy 15, no. 2 (2008): 104. Karen Young makes the point that “the earliest externally focused sovereign wealth fund in Saudi Arabia was established in 2008, the Sanabil Al Saudia, with just $5.3 billion in assets”; see Karen Young, “What’s Yours Is Mine: Gulf SWFs as a Barometer of State-Society Relations,” POMEPS (blog), accessed October 3, 2023, https://pomeps.org/whats-yours-is-mine-gulf-swfs-as-a-barometer-of-state-society-relations.

¹² David Rundell, Vision or Mirage: Saudi Arabia at a Crossroads (London: I.B. Tauris, 2020), 215.

¹³ Mark Mazzetti and Ben Hubbard, “Rise of Saudi Prince Shatters Decades of Royal Tradition,” New York Times, October 15, 2016, https://www.nytimes.com/2016/10/16/world/rise-of-saudi-prince-shatters-decades-of-royal-tradition.html.

¹⁴ After the death of Saudi Arabia’s founder, King Abdulaziz bin Abdulrahman Al Saud, in November 1953, decisionmaking authority was shared among multiple circles of powerful princes who constituted an informal yet effective system of checks and balances that fell away between 2010 and 2015 as long-serving princes aged and died.

¹⁵ Joseph Kéchichian, “Saudi Arabia’s Succession Shakeup and the Rise of Mohammed bin Salman,” Middle East Institute, May 20, 2015, https://www.mei.edu/publications/saudi-arabias-succession-shakeup-and-rise-mohammed-bin-salman; see also “Saudi Aramco Gets New Supreme Council Headed by Deputy Crown Prince: Statement,” Reuters, May 1, 2015, https://www.reuters.com/article/saudi-oil-aramco/saudi-aramco-gets-new-supreme-council-headed-by-deputy-crown-prince-statement-idUSL5N0XS0LR20150501.

¹⁶ “Vision 2030,” Kingdom of Saudi Arabia, 2016, 7, 42, https://www.vision2030.gov.sa/v2030/overview/. In 2019, the leadership of PIF and Saudi Aramco was brought still closer when PIF Governor al-Rumayyan was appointed chairman of Saudi Aramco.

¹⁷ Stephan Roll, “A Sovereign Wealth Fund for the Prince: Economic Reforms and Power Consolidation in Saudi Arabia,” German Institute for International and Security Affairs, SWP Research Paper 8, July 2019, 18–19, https://www.swp-berlin.org/publications/products/research_papers/2019RP08_rll_Web.pdf.

¹⁸ Rory Jones, Summer Said, and Stephen Kalin, “Saudi Crown Prince’s Vision for Neom, a Desert City-State, Tests His Builders,” Wall Street Journal, May 1, 2021, https://www.wsj.com/articles/saudi-crown-princes-vision-for-neom-a-desert-city-state-tests-his-builders-11619870401; and Rory Jones, “Expatriate Executives Flee Saudi Arabia’s Bad Bosses,” Wall Street Journal, May 31, 2022, https://www.wsj.com/articles/expatriate-executives-flee-saudi-arabias-bad-bosses-crown-prince-mohammed-mbs-neom-nasr-11654008823.

¹⁹ Jon Gambrell, “Saudi Prince Gives 4% Aramco Stake to Public Investment Firm,” Associated Press, April 16, 2023, https://apnews.com/article/saudi-aramco-investment-fund-bin-salman-588c181870b7818e3468eb7ed18ef091.

²⁰ In February 2021, a summary of findings into Khashoggi’s killing was released by the Office of the Director of National Intelligence, which determined “that Saudi Arabia’s Crown Prince Muhammad bin Salman approved an operation in Istanbul, Türkiye to capture or kill Saudi journalist Jamal Khashoggi.” Office of the Director of National Intelligence, “Assessing the Saudi Government’s Role in the Killing of Jamal Khashoggi,” February 11, 2021, https://www.dni.gov/files/ODNI/documents/assessments/Assessment-Saudi-Gov-Role-in-JK-Death-20210226v2.pdf.

²¹ Joshua Robinson, “The Saudi Power Broker of Spanish Soccer’s Second Division,” Wall Street Journal, July 27, 2020, https://www.wsj.com/articles/the-saudi-power-broker-of-spanish-soccers-second-division-11595851200.

²² Joseph Currier, “Preview and Predictions for WWE’s ‘Crown Jewel’ in Saudi Arabia,” Sports Illustrated, October 20, 2021, https://www.si.com/wrestling/2022/11/04/wwe-crown-jewel-preview-predictions-full-match-card.

²³ Ruth Michaelson, “Saudi Arabia Has Spent at Least $1.5 Billion on ‘Sportswashing,’ Report Reveals,” Guardian, March 28, 2021, https://www.theguardian.com/world/2021/mar/28/saudi-arabia-has-spent-at-least-15bn-on-sportswashing-report-reveals. In March 2022, the second Saudi Arabian Grand Prix was disrupted by a drone and missile attack by Houthi militants in Yemen on a Saudi Aramco depot located ten miles from the Jeddah Corniche Circuit, during one of the two practice sessions before the race, which was held without incident. Giles Richards, “Saudi Arabian Grand Prix To Go Ahead as Planned Despite Houthi Missile Attack,” Guardian, March 26, 2022, https://www.theguardian.com/sport/2022/mar/25/saudi-arabian-grand-prix-at-risk-of-cancellation-after-houthi-missile-attack.

²⁴ Sussan Saikali, “A New Virtual Reality: The Growth of Esports and Gaming in Saudi Arabia,” Arab Gulf States Institute in Washington, March 17, 2022, https://agsiw.org/a-new-virtual-reality-the-growth-of-esports-and-gaming-in-saudi-arabia/; and Ian Oxborrow, “Saudi Arabia’s PIF Acquires $1bn Stake in Sweden’s Embracer Gaming Group,” National News, June 8, 2022, https://www.thenationalnews.com/business/technology/2022/06/08/saudi-arabias-pif-acquires-1bn-stake-in-swedens-embracer-gaming-group/. Mohammed bin Salman is an avid gamer according to media reports. “With a Gamer Prince and Oil Billions, Saudi Turns to eSports,” AFP, September 22, 2022, https://www.france24.com/en/live-news/20220922-with-a-gamer-prince-and-oil-billions-saudi-turns-to-esports.

²⁵ Murad Ahmed, “How a Saudi-Led Consortium Won Control of Newcastle United,” Financial Times, October 8, 2021, https://www.ft.com/content/ed0d401a-ff9b-4199-9f5f-7a2a3e5727ca.

²⁶ Joey D’Urso, “Newcastle Takeover: Why PIF and the Saudi State Are the Same Thing,” The Athletic, October 13, 2021, https://theathletic.com/2886837/2021/10/14/newcastle-takeover-why-pif-and-the-saudi-state-are-the-same-thing/.

²⁷ Simone Foxman and Bryce Baschuk, “WTO Ruling Against Saudis Clouds Prospects for U.K. Soccer Deal,” Bloomberg, June 16, 2020, https://www.bloomberg.com/news/articles/2020-06-16/ruling-against-saudi-clouds-prospects-for-newcastle-soccer-deal#xj4y7vzkg.

²⁸ beIN had been blocked from Saudi Arabia during the blockade of Qatar, which began on June 5, 2017, and ended on January 5, 2021; however, agreement to restore beIN’s access to Saudi Arabia took nine more months to reach. Matt Slater, “Newcastle Takeover: Why BeIN Digital Piracy Battle Was Always the Key,” Athletic, October 7, 2021, https://theathletic.com/2874292/2021/10/08/newcastle-takeover-why-bein-digital-piracy-battle-was-always-the-key/.

²⁹ George Caulkin, “Newcastle’s Saudi Arabia-backed Takeover Completed to End Ashley’s 14-Year Reign,” Athletic, October 10, 2021, https://theathletic.com/4195673/2021/10/06/newcastles-saudi-arabia-backed-takeover-completed-to-end-ashleys-14-year-reign/.

³⁰ Chris Waugh, “We Need to Talk About Newcastle United and Saudi Arabia,” Athletic, June 28, 2022, https://theathletic.com/3387217/2022/06/29/newcastle-united-saudi-arabia-kit/. The jersey in question was Newcastle’s third strip rather than the famous black-and-white home jersey or the alternate away strip.

³¹ Simon Chadwick, “Sport-washing, Soft Power and Scrubbing the Stains,” Asia & the Pacific Policy Society, Policy Forum, August 24, 2018, https://www.policyforum.net/sport-washing-soft-power-and-scrubbing-the-stains/. Notably, the term “sports-washing” did not exist in 2008, when the Summer Olympics took place in Beijing and when Manchester City in the EPL was acquired by the Abu Dhabi United Group and Sheikh Mansour bin Zayed Al Nayhan, the minister of presidential affairs in the UAE, or in 2010, when Qatar was awarded the hosting rights for the 2022 FIFA World Cup. More recently, the sponsorship of professional cycling teams by Bahrain and the UAE has been seen to fall under the umbrella of “sports-washing,” as has the hosting of the 2018 FIFA World Cup in Russia and the 2022 Winter Olympics in Beijing.

³² Owen Poindexter, “LIV Golf Announces $2B Investment, Expanded Schedule for 2023–2025,” Front Office Sports, May 10, 2022, https://frontofficesports.com/liv-golf-announces-2b-investment-expanded-schedule-for-2023-2025/.

³³ Rawan Radwan, “Mohammed bin Salman Announces New 5-Year Strategy for Saudi Arabia’s Economy,” Arab News, January 24, 2021, https://www.arabnews.com/node/1797696/saudi-arabia.

³⁴ Marco Ferrari, “Saudi Government Orders Up to 100,000 Electric Vehicles from PIF-owned Lucid,” Al Arabiya, April 27, 2022, https://english.alarabiya.net/News/gulf/2022/04/27/Saudi-government-orders-up-to-100-000-electric-vehicles-from-PIF-owned-Lucid.

³⁵ See “Public Investment Fund Strategy 2021-2025,” Public Investment Fund, accessed October 3, 2023, 9, https://www.pif.gov.sa/en/Pages/VRP2021-2025.aspx.

³⁶ The Neom/McLaren agreement is therefore a combination of soft power and branding and an example of an investment by the PIF to contribute to the development of research and investment capacity in Saudi Arabia. See “McLaren Racing and Neom Announce Strategic Title Partnership to Drive Innovation and Talent Development in Electric Motorsport,” McLaren Group, press release, June 27, 2022, https://www.neom.com/en-us/newsroom/neom-mclaren-racing-partnership.

³⁷ As of 2022, the Newcastle shirt sponsor is Fun88, a Chinese sports betting company, although media reporting has suggested that the agreement may be terminated in 2023 and that the replacement may be a Saudi entity. In June 2022, the club announced that Noon.com, a Dubai-based e-commerce platform in which the PIF has invested $2 billion, will sponsor the sleeves of the Newcastle jersey in a deal said to be worth more than $400 million. See “Report: Newcastle Cutting Short Fun88 Sponsorship to Free Up Shirt Inventory,” Sports Pro Media, June 9, 2022, https://www.sportspromedia.com/news/newcastle-united-shirt-sponsor-fun88-saudi-arabia-pif/; and Ian Oxborrow, “Noon.com to Sponsor Newcastle United Shirts in New Premier League Season,” National News, June 28, 2022, https://www.thenationalnews.com/business/2022/06/28/nooncom-to-sponsor-newcastle-united-shirts-in-new-premier-league-season/.

³⁸ Eman Alhussein, “Saudi Arabia’s Nation-Branding Strategy,” Arab Gulf States Institute in Washington, June 9, 2022, 9–10, https://agsiw.org/saudi-arabias-nation-branding-strategy/.

³⁹ Jack Bezants, “Meet Yasir al-Rumayyan, the Golf Lover Set to Become Newcastle’s New Chairman Who Plans to Increase Saudi Arabia’s Unimaginable Wealth into the TRILLIONS . . . And He Has Colossal Ambitions for His New Football Club Too,” Daily Mail, April 24, 2020, https://www.dailymail.co.uk/sport/football/article-8245677/Meet-Yasir-Al-Rumayyan-golf-lover-set-Newcastles-new-chairman.html.

⁴⁰ An analogy would be Saudi Arabia and/or the PIF setting up a rival soccer league or motor racing championship and incentivizing teams to jump ship.

⁴¹ Vivian Nereim and Ahmed Al Omran, “Saudi Arabia Relishes a Triumph That Transcends Sports,” New York Times, June 7, 2023, https://www.nytimes.com/2023/06/07/world/middleeast/us-saudi-arabia-liv-golf.html.

⁴² Kirkpatrick and Kelly, “Saudi Investment Fund Had Big Doubts.” The LIV Golf Invitational Bedminster in July 2022 and the season-ending LIV Golf Invitational Miami in October 2022 took place at courses owned by Donald Trump—the latter with an expanded prize money pot of $30 million (compared to the $20 million pots at each of the other seven LIV tournaments for the 2022 season).

⁴³ “Crown Prince Expects Saudi Arabia’s Population to Reach 50-60 Million by 2030,” Argaam, July 26, 2022, https://www.argaam.com/en/article/articledetail/id/1576399.

⁴⁴ Central Intelligence Agency, “Saudi Arabia,” World Factbook, accessed October 3, 2023, https://www.cia.gov/the-world-factbook/countries/saudi-arabia/#people-and-society.

⁴⁵ Matt Slater, “Soccer, Golf, F1, Cycling and More. Saudi Arabia is Buying Sport – This is Why,” Athletic, July 10, 2023, https://theathletic.com/4671408/2023/07/11/saudi-arabia-sport-investment-pif/.

⁴⁶ “PIF Establishes SRJ Sports Investments Company to Elevate Sports Sector in Saudi Arabia and MENA,” Public Investment Fund, August 6, 2023, https://www.pif.gov.sa/en/Pages/NewsDetails.aspx?NewsId-254/PIF-Establishes-SRJ-Sports-Investments-Company-to-Elevate-Sports-Sector-in-Saudi-Arabia-and-MENA.

⁴⁷ Gulf airlines such as Emirates, Etihad, and Qatar Airways have been prominent sponsors of soccer teams around the world, and the first instance of a Gulf airline being featured on a European soccer jersey came in 1983 when Bahrain’s Gulf Air became the first-ever commercial sponsor of Chelsea Football Club in London.

⁴⁸ Tariq Panja, “In P.S.G. Case, Documents Show UEFA Surrendered Without a Fight,” New York Times, July 24, 2019, https://www.nytimes.com/2019/07/24/sports/psg-uefa-ffp.html; and Rafael Buschmann, Nicola Naber, and Christoph Winterbach, “Sponsorship Money—Paid For by the State,” Der Spiegel, April 7, 2022, https://www.spiegel.de/international/europe/sponsorship-money-paid-for-by-the-state-a-2ad5b586-1d82-4a21-8065-f3c081cd91a4.

Coronavirus was running rampant through Ghana in early 2021. Exacerbating the crisis was a worldwide shortage of vaccines, especially for low-income countries. After India halted exports of the AstraZeneca coronavirus vaccine, no producer could promise deliveries before August 2021,¹ imperiling the Ghanaian president’s goal of having every eligible citizen vaccinated by October of that year.² The only vaccine Ghana’s minister of health, Kwaku Agyeman-Manu, found that could be delivered sooner was Russia’s Sputnik V vaccine, leading him to sign dubious contracts for it at double the going price.

In front of a Ghanaian parliamentary commission, Agyeman-Manu testified that he tried to buy the vaccines directly from its producer, Russia’s Gamaleya Research Institute of Epidemiology and Microbiology, at the factory price of $20 per two-dose regimen.³ Unfortunately, he could not use this more direct and cheaper route because Russia’s leading sovereign wealth fund, the Russian Direct Investment Fund (RDIF), had been tasked by Russian President Vladimir Putin with marketing the vaccine. The RDIF, in turn, had given the exclusive resale rights for exporting Sputnik V to a new company based in the United Arab Emirates (UAE), Aurugulf Health Investments.⁴

Aurugulf, in turn, used a colorful cast of intermediaries and agents, including a member of an Emirati royal family and a convicted Norwegian fraudster, to sell the vaccine to many developing countries at double the cost to produce it. Agyeman-Manu testified that, because of the critical need for the vaccine, he reluctantly signed contracts for $38 per two-shot regimen rather than the $20 factory price.⁵ Fortunately, Ghana was able to get its money back after Aurugulf was unable to fulfill the contract, but it was hardly the only country to find itself paying well above market prices for this potentially life-saving vaccine.

This report highlights several means that elites exploit to abuse sovereign wealth funds for private gain. One might not expect such rent-seeking activity around the provision of vital vaccines during a global pandemic. Nonetheless, investigative journalism and government inquiries have both documented the RDIF’s role in marketing Sputnik V at overinflated prices through a series of controversial intermediaries. There is no information about why some countries were charged more for the Sputnik V vaccine than others nor about how this additional money was distributed. Higher prices and the use of middlemen do not necessarily mean that corruption occurred. This case demonstrates, however, that contracts associated with emergency situations such as a pandemic that are further enmeshed in opaque sovereign wealth funds—especially a fund with a reputation as a “slush fund for President Vladimir Putin”⁶—can raise red flags for possible corrupt activity.

Sputnik V

Putin himself launched the Sputnik V vaccine with great fanfare via a videoconference in August 2020, describing it as effective and so safe that one of his own daughters had been vaccinated.⁷ (Putin himself would not be vaccinated with Sputnik V until March 2021, and this was not disclosed until June 2021. The vaccination occurred privately and without a photo op.)⁸ The vaccine was advertised as having an efficacy of over 90 percent and a price half that of similarly effective vaccines. Russia also emphasized that it would be easier to transport and store since it would not require cold storage like mRNA vaccines, such as those produced by Pfizer or Moderna, making Sputnik V ideal for the developing world.⁹

Sputnik V was developed by the Gamaleya Research Institute of Epidemiology and Microbiology, a 140-year-old research center that had been involved in vaccinations for everything from inoculating Soviet citizens against smallpox to, more recently, producing experimental vaccines for Ebola and Middle East Respiratory Syndrome.¹⁰ But despite Putin’s assertions about the safety of Sputnik V, at the time, scientists had not published data from the vaccine’s Phase I and II trials and had not even started Phase III trials.¹¹

It was nonetheless marketed extensively internationally, with Russian officials claiming that it had been approved in seventy countries by September 2021.¹² An early peer-reviewed report in the respected medical journal The Lancet stated that the vaccine was 91.6 percent effective and deemed it safe, boosting its appeal.¹³ Russian state networks RT and Sputnik News provided expansive coverage of the vaccine receiving positive receptions in countries like Argentina, Brazil, India, the Philippines, Thailand, and Venezuela.¹⁴ Russia’s exports were prioritized over domestic distribution—with millions of doses pledged to countries such as Hungary and Serbia—even while there were still substantial shortages within Russia.¹⁵

Despite the rhetoric of Russian vaccine diplomacy, the vaccine was provided almost solely on a commercial basis and without Russia providing doses through COVAX, the global initiative to distribute vaccines to low-income countries.¹⁶ At $20 for the two-dose vaccine, it cost much more than AstraZeneca at $3 per dose, Pfizer at $6.75, or Johnson & Johnson’s single-dose vaccine at $10.¹⁷ Moreover, production capacity never came close to living up to the hype. For instance, a January 2021 story on Russian television claimed that hundreds of thousands of doses were being delivered daily across Russia; in reality, the numbers were only a few thousand per week.¹⁸ Moscow also developed an information campaign, touting Sputnik V while attacking Western vaccines’ safety, side effects, and approval procedures.¹⁹ Any criticism of the vaccine was dismissed by Russia as Russophobic attacks.²⁰

The Russian Direct Investment Fund

Putin assigned the RDIF the task of funding and marketing Sputnik V. The RDIF was established in 2011 by order of the former Russian president Dmitry Medvedev and also Putin, who was then serving as prime minister. It is an unusual form of sovereign wealth fund: rather than investing the proceeds from domestic oil or other natural resources outside of Russia to help diversify the economy, the RDIF focuses on establishing joint ventures with foreign firms and funds for investments within Russia. The Russian state matches other investors’ funds.²¹ The $40 billion fund has facilitated over 100 deals, with only about 10 percent of the investment money coming from Russia.²²

Since its inception, the fund had been closely linked with the elite financiers. Inaugural investors included Blackstone Group’s Stephen Schwarzman, TPG Capital’s David Bonderman, and Apollo Global Management’s Leon Black, among others. (These three withdrew their names from a published list of advisers after Russia’s 2014 invasion of Ukraine.)²³ At that time, the RDIF was part of Vnesheconombank (VEB), a Russian development fund linked to Russia’s security services that was partially sanctioned by the United States in 2015.²⁴ The RDIF separated from VEB in 2016 and was not resanctioned until the February 2022 Russian invasion of Ukraine.²⁵

Other investors filled in, however, and have remained with the RDIF even as sanctions have increased. In 2015, Saudi Arabia’s Public Investment Fund committed $10 billion to the RDIF and the China Investment Corporation (a Chinese sovereign wealth fund) invested another $10 billion two years later.²⁶ Since 2013, the United Arab Emirates’ Mubadala fund has also been a prominent investor.²⁷ As Matthew Murray, an adviser on ethics for the RDIF in its early days, noted, “[The RDIF] started making alliances with China and other countries that were not going to hold them to basic corporate governance, business ethics and anti-corruption standards.”²⁸

Kirill Dmitriev, the RDIF’s director, came up with the name Sputnik V (the V stands for vaccine), likening the vaccine’s discovery to the Soviet Union’s launch of the world’s first artificial satellite.²⁹ Dmitriev has been one of the key public backers of the vaccine in the media.³⁰ He has long ties with the United States: he studied at Stanford University and Harvard Business School and has worked for Goldman Sachs and McKinsey & Co.³¹

Dmitriev is married to Natalia Popova, the deputy director of a scientific institute called Innopraktika, which is part of a $1.5 billion project to build a technology hub at Moscow State University.³² Innopraktika is run by Putin’s younger daughter Katerina Tikhonova, who studied at university with Popova. It is their relationship that was presumably Dmitriev’s entrée into Putin’s inner circle. Some have even floated Dmitriev’s name as a future deputy prime minister and a potential successor to Putin.³³ Thus, “this combination of official and unofficial duties makes Dmitriev a crucial figure in the Sputnik V story, acting at the intersection of the public and nonpublic interests of the Putin regime.”³⁴

The Sputnik V Supply Chain

One would expect that Russia’s Ministry of Foreign Affairs or perhaps its Ministry of Health would lead vaccine diplomacy. Instead, the supply chain for countries to purchase Sputnik V ran through the RDIF and a company called Human Vaccine that the fund had established to handle Sputnik V marketing.³⁵ Some countries, such as European Union members Hungary and Slovakia, were able to make direct deals with Human Vaccine to buy Sputnik V doses for $20 for the two-dose regimen.³⁶ 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 as the “exclusive seller and distributor of Human Vaccine’s Sputnik V” for several countries in Africa and Asia.³⁷

Aurugulf was registered in October 2020, just two months after Sputnik V was authorized in Russia.³⁸ Rather than allowing government-to-government sales of the vaccine, Russian authorities told developing country governments—including Ghana’s—that they must use Aurugulf as a middleman in the transactions when those countries tried to deal directly with Russia. Russian officials were in some cases not even aware of this vaccine distribution agreement. A Russian diplomat in Kenya, for instance, stated that the Russian Embassy there was not involved in vaccine distribution at all.³⁹

Aurugulf’s company “agent” assigned to “develop, distribute and market” Sputnik V is a relatively minor member of the royal family of Dubai, His Highness Sheikh Ahmed Dalmook al-Maktoum.⁴⁰ Per reporting by the Moscow Times, al-Maktoum received explicit approval from Moscow to sell Sputnik V in the developing world.⁴¹ Invoices for the vaccine sent to Pakistan and published by the Moscow Times were on the letterhead of his private office, leaving little doubt of his personal involvement.⁴² Payments for the vaccines Ghana bought (worth $64.6 million) were to go to al-Maktoum’s private office,⁴³ and the deal with Ghana for the 3.4 million doses at $38 per two-shot regime would have netted Aurugulf $30 million.⁴⁴ Per the company’s website, Sputnik V appears to be its only product.

According to corporate registry documents seen by the Moscow Times, a conglomerate called Royal Group is one of the two entities that control Aurugulf.⁴⁵ Royal Group is run by the UAE’s national security adviser (and brother of the UAE president) Sheikh Tahnoon bin Zayed al-Nahyan.⁴⁶

Another company that is part of Royal Group and linked to Aurugulf is Chimera Investment.⁴⁷ It was involved in deals with private sector providers in Lebanon and Pakistan.⁴⁸ Founded in 2017, Chimera Investment is an Abu Dhabi–based venture capital firm.⁴⁹ As recently as October 2021, Mubadala was a major investor in Chimera’s main investment fund.⁵⁰ (See Chapter 11 for more information on Mubadala.)

In addition to al-Maktoum’s investments with the RDIF, Mubadala has had a co-investment program with the RDIF since 2013, whereby each contributed $1 billion to pursue investments in Russia.⁵¹ As of January 2022, Mubadala, the RDIF, and Sberinvest (a venture capital arm of Russia’s largest bank, Sberbank) had jointly invested $190 million in commercial data center operator IXcellerate, located in Moscow.⁵² In March 2022, Mubadala’s chief executive officer, Khaldoon Khalifa al-Mubarak, announced that the fund was pausing its investments in Russia because of Russia’s invasion of Ukraine. At the time, Mubadala claimed it had invested about $3 billion in fifty companies via the RDIF, but that its investment was down to less than 1 percent of its $243 billion portfolio.⁵³

In at least one case, Mubadala’s investments seemed to run in parallel with those of al-Maktoum’s vaccine business activities. In October 2021, the president of Guyana, Irfaan Ali, visited an Emirati vaccine storage facility in Abu Dhabi with the chief executive officer of Abu Dhabi Ports, Mohamed Juma al-Shamisi, to discuss the possibility of creating a new logistics hub for the UAE in Guyana. Al-Maktoum was also in attendance. The day prior, the Guyanese minister of finance had attended a meeting in the Emirate of Dubai with a delegation from Mubadala regarding possible future investments in the country.⁵⁴ Guyana, too, had purchased Sputnik V vaccines from Aurugulf in March 2021, also at double the factory price per dose.⁵⁵

One of the few explanations given for the steep markup in some Sputnik V vaccine prices was transportation. The vaccine was being transshipped through the UAE rather than directly from Russia, per Sputnik V shipping documents. Nonetheless, the Moscow Times cites transportation costs as being about $0.10 per dose, so this should not have added substantially to the cost of the vaccination series.⁵⁶ As a report by the Institute of Modern Russia points out, “Given the fact that the key person behind the Sputnik V market drive is a member of Putin’s inner circle, the lucrative market opportunities also suggest that Putin or his associates stand to gain personally from this effort.”⁵⁷

Sputnik V’s Anomalous Intermediaries

While the trade network for many countries such as Hungary was straightforward—countries purchased the vaccine directly from Human Vaccine LLC—other countries, like Ghana, were forced to use a complex network in which many of the intermediaries had unique business backgrounds.

The head of the company designated as the intermediary for many of the purchases, Aurugulf Health Investment’s Sheikh Ahmed Dalmook al-Maktoum, had no medical or pharmaceutical background. Al-Maktoum is second cousin to the ruler of Dubai, Sheikh Mohammed bin Rashid al-Maktoum, who is also the vice president, prime minister, and minister of defense of the UAE.⁵⁸ Sheikh Ahmed Dalmook al-Maktoum is also the chairman of the board of the Dubai-based Africa and Middle East Resources Investment (Ameri) Group, whose website claims that it owns and operates electrical equipment around the world.⁵⁹ However, Ameri Group has had a controversial past, including in Ghana. In 2015, Norwegian investigative journalists documented that the group had signed a $510 million agreement with Ghana’s minister of power for a BOOT (build, own, operate, and transfer) deal for ten gas turbines that would actually have been worth about $220 million if they had been bought directly from the producer, General Electric.⁶⁰ Per al-Maktoum’s website, he signed a new agreement for “power projects” with Ghana’s Ministry of Energy on January 2, 2019.

Another affiliate associated with Sputnik V is Norwegian Per Morten Hansen. A Norwegian newspaper has alleged that Hansen and al-Maktoum have been involved in pump-and-dump shares scams on the London Stock Exchange.⁶¹ Over the years, Hansen has had several (some unsuccessful) careers in nightclub ownership, debt collection, noodles sales, diamond cultivation in Sierra Leone, cannabis oil production, and Bitcoin mining in Sweden.⁶² He also has developed a lengthy rap sheet. In 1992, he was convicted by a Norwegian court of receiving the proceeds of a crime (including a stolen lithograph created by the famous painter Edvard Munch), and in 2003, he was sentenced to eighteen months in prison for fraud for not paying customs duties. In 2010, he assisted then seventeen-year-old Arkadiy Abramovich, the son of Russian oligarch Roman Abramovich, in his failed bid to buy the FC Copenhagen soccer team.⁶³ He was arrested again in November 2019 in Copenhagen for money laundering at the request of Norwegian authorities; in March 2023, he was convicted and sentenced to two years and five months, which Hansen’s lawyer said he plans to appeal. In 2020, Norwegian authorities also seized two of his properties to settle a tax evasion.⁶⁴

Another controversial person associated with al-Maktoum and Hansen is Umar Farooq Zahoor, the former chief executive of Ameri Group. He is a Pakistani national who grew up in Norway. In 2003, Zahoor was convicted of embezzlement in Norway. He has also been accused by the Oslo police of being a ringleader of the Nordea bank swindle, in which he and a partner allegedly emptied $10 million from the bank account of a rich widow.⁶⁵ Zahoor denies he is guilty, and the Emirates has refused to extradite him back to Norway.⁶⁶ He is also wanted by Swiss authorities for allegations that he was running a fake bank there. His business partner was sentenced to more than three years in prison, but Zahoor escaped to Pakistan and then Dubai before he could be arrested; the statute of limitations in the case has since expired.⁶⁷ Al-Maktoum’s office frequently denies that Zahoor works for him, but newspaper reports mention him signing contracts and employees have previously confirmed to journalists that Zahoor is indeed an employee, though his current position with the company is unclear.⁶⁸ Zahoor accompanied al-Maktoum to Ghana in March 2021 to sign the contract for the Sputnik V vaccine.⁶⁹ Zahoor has repeatedly denied all allegations.⁷⁰

Hansen denies any involvement in upselling the Sputnik V vaccine to Ghana without Ghanian parliamentary approval despite audio recordings obtained by the Norwegian newspaper VG of Hansen discussing his role in the sale.⁷¹ Hansen also denied his relationship with al-Maktoum to another Norwegian newspaper, saying, “I have no relationship with Sheikh Ahmed Dalmook al-Maktoum other than that I have invested in parallel with the sheikh on a couple of occasions.”⁷² Zahoor claimed to the same newspaper that the details of the Ghanaian contracts could not be disclosed because of nondisclosure agreements and that he was not involved in the negotiations for the contract.⁷³ Al-Maktoum never responded to VG’s questions, but there is a letter purportedly signed by him as chairman of Ameri Group rebutting VG’s allegations on the website opensourceinvestigations.com.⁷⁴ 

Conclusion

Despite the lack of public comment from those involved in Sputnik V sales, there may be several reasons why the Russian government used such an indirect route for vaccine shipments, which were supposed to be a centerpiece of their vaccine diplomacy. The government may have wanted to limit liability or perhaps curry favor with the UAE, for instance.⁷⁵ But the choice of intermediaries and the upselling of the vaccine raises concerns. Ghana was hardly the only country to pay an exorbitant price for vaccines. The RDIF and its intermediaries have also upsold the vaccine to Guyana, Iraq, and Pakistan.⁷⁶ Like Ghana, Guyana was charged double the manufacturing price per Sputnik V dose by Ameri Group.⁷⁷ In Pakistan, a private company bought the vaccine for $45 per two-shot regimen and then sold it to patients for $78.⁷⁸ Kenya paid the same $19 per dose as Ghana and Guyana but then sold it to clinics for $42 per dose, with some patients then paying as much as $70 per dose. Kenyan authorities paused the vaccine’s use due to health and safety concerns.⁷⁹

The global market for coronavirus vaccines was estimated to be worth $75 billion in 2020 and $90 billion in 2021.⁸⁰ Russia was supposed to provide enough doses for 700 million people,⁸¹ which at $20 per two-shot regimen would have been worth $14 billion. But even without the upselling concerns, delivery problems plagued Sputnik V exports, making the Russian vaccine more of an afterthought in the global market than a major player.⁸² Guatemala ordered 8 million doses in April 2021 and put down an advance payment for half of them, but by July, it had only received 150,000 doses.⁸³ Iran contracted for 5 million doses as part of a “first phase” agreement in February 2021 but had only received 920,000 by July.⁸⁴ Bolivia contracted for 5.2 million doses in December 2020 but had only received 745,000 doses by the end of May 2021.⁸⁵ Mexico contracted for 24 million doses in January 2021 but received only 4.1 million by July. The list goes on.⁸⁶

Ghana was fortunate that it received its money back from al-Maktoum after the country received only 20,000 of the 300,000 expected doses.⁸⁷ Despite Ghana’s parliament finding that the health minister had breached the country’s constitution by not receiving approval for the contract from the cabinet or the Public Procurement Authority, he did not lose his job and remained in his post until February 2024.⁸⁸ In the end, Ghanaians ended up having to wait for the AstraZeneca and Pfizer vaccine deliveries to resume in August 2021.⁸⁹

Aurugulf was not the only intermediary for Sputnik V. Forbes has reported that the San Juan province of Argentina attempted to purchase the Sputnik V vaccine at double the standard price through a German intermediary called RuL AG and deposited 18 million euros ($21 million per the exchange rate in March 2021) in escrow to pay for the doses, but said the contract was breached after delays and incomplete documentation.⁹⁰ Like Sheikh Ahmed Dalmook, RuL AG specializes in the energy business rather than the medical sector. The company is run by Stephan Guth, who is also the director of the German lower-division soccer team FC Lokomotive Leipzig and sits on the board of a firm called PHC Torpedo Leipzig that promotes ice hockey in Leipzig.⁹¹ Guth’s various business enterprises have a limited presence online.⁹²

Meanwhile, Sputnik V never received World Health Organization (WHO) approval, and countries like Brazil, Kenya, Namibia, and South Africa have discontinued its use over safety concerns.⁹³ In response to the Russian invasion of Ukraine, the U.S. Treasury Department and the European Union sanctioned the RDIF;⁹⁴ the U.S. Treasury labeled the RDIF “a symbol of Russian kleptocracy” and stated that it is widely considered a “slush fund for President Vladimir Putin.”⁹⁵ In a statement on the official Sputnik V English-language website, the RDIF responded that it “was never involved in any political activities” and that the sanctions could deprive many in the world of access to Russian vaccines.⁹⁶ The statement also claims that the RDIF “always fully complies with laws of the countries where it conducts its investments” and that “defamatory and denigrating statements made by the Biden administration about RDIF have absolutely no basis and represent blatant violation of its [the fund’s] rights.”⁹⁷ In response to sanctions and the lack of WHO approval, the head of the Gamaleya Research Institute of Epidemiology and Microbiology, Alexander Gintsburg, argued that approval had deliberately not been granted to Sputnik V to prevent a large share of the world’s vaccine market from shifting to the Russian Federation.

Fortunately, in early 2022, the medical journal Lancet Regional Health—Americas announced that other vaccines that use mRNA technology, such as the Moderna, Pfizer, and AstraZeneca vaccines, could be used as second doses for Sputnik V based on a study from Argentina.⁹⁸ Only about 2.5 percent of those vaccinated worldwide received the Sputnik V shot, and only about 300 million doses were sold.⁹⁹

During a pandemic, the public might reasonably expect a country’s government to allocate money to relevant health authorities to develop a vaccine and its foreign affairs ministry to be in charge of arranging deals with other countries, especially if those deals are part of much-touted vaccine diplomacy. In the case of Sputnik V, however, the development, marketing, and export of Sputnik V were assigned to the country’s sovereign wealth fund. This decreased the potential transparency and accountability around vaccine-related expenditures, especially given the notorious links to corruption among associates of the RDIF. The cast of shadowy intermediaries involved with the Sputnik V export network only heightens concerns about rent-seeking and outright corruption. The coronavirus 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.

Acknowledgments

A special thank you to Michael Blaesing for his extraordinary assistance in researching the Sputnik V case in chapter 7.

Notes

¹ “Report of the Ad Hoc Committee to Investigate the Procurement Contract Between the Government of the Republic of Ghana and His Highness Sheikh Ahmed Dalmook al Maktoum and S.L. Global for the Supply of Sputnik-V Covid-19 Vaccines,” Parliament of Ghana, August 2021, 9–10, https://citinewsroom.com/wp-content/uploads/2021/08/REPORT-OF-AD-HOC-COMMITTE-FINAL.pdf.

² Rolf J. Wideroe and Markus Tobiassen, “Sputnik for Sale,” VG Nett, June 3, 2021, https://www.vg.no/spesial/2021/sputnik/index-en.html.

³ The Sputnik V website translates this as Gamaleya National Center of Epidemiology and Microbiology.

⁴ Parliament of Ghana, “Report of the Ad Hoc Committee,” 10–24.

⁵ Parliament of Ghana, “Report of the Ad Hoc Committee,” 17–19.

⁶ “Treasury Prohibits Transactions With Central Bank of Russia and Imposes Sanctions on Key Sources of Russia’s Wealth,” U.S. Department of the Treasury, press release, February 28, 2022, https://home.treasury.gov/news/press-releases/jy0612.

⁷ Joshua Yaffa, “The Sputnik V Vaccine and Russia’s Race to Immunity,” New Yorker, February 8, 2021, 18, https://www.newyorker.com/magazine/2021/02/08/the-sputnik-v-vaccine-and-russias-race-to-immunity.

⁸ Vera Michlin-Shapir and Olga Khvostunova, “The Rise and Fall of Sputnik V,” Institute of Modern Russia, October 2021, 13, 30, https://imrussia.org/images/stories/Reports/Sputnik-V/IMR_Sputnik_eng_final_web_v2.pdf.

⁹ Paul Stronski, “Russian COVID-19 Diplomacy in Africa: A Mixed Bag,” Carnegie Endowment for International Peace, December 10, 2021, https://carnegieendowment.org/2021/12/10/russian-covid-19-diplomacy-in-africa-mixed-bag-pub-85971. Sputnik V is a vector vaccine like those developed by AstraZeneca and Johnson & Johnson. It uses disabled viruses to implant genetic material into human cells to cause an immune response. Sputnik V is different from these vaccines, however, in that it uses two different types of so-called adenoviruses to implant that genetic material. Each is delivered through a different vaccine shot, so two rounds using different shots are required, which makes administering the vaccine more complicated. See also Michlin-Shapir and Khvostunova, “The Rise and Fall of Sputnik V,” 19.

¹⁰ Yaffa, “The Sputnik V Vaccine and Russia’s Race to Immunity,” 18–19.

¹¹ Yaffa, “The Sputnik V Vaccine and Russia’s Race to Immunity,” 19.

¹² Michlin-Shapir and Khvostunova, “The Rise and Fall of Sputnik V,” 7.

¹³ Michlin-Shapir and Khvostunova, “The Rise and Fall of Sputnik V,” 11.

¹⁴ Michlin-Shapir and Khvostunova, “The Rise and Fall of Sputnik V,” 16.

¹⁵ Michlin-Shapir and Khvostunova, “The Rise and Fall of Sputnik V,” 27.

¹⁶ Stronski, “Russian COVID-19 Diplomacy in Africa: A Mixed Bag.”

¹⁷ Stronski, “Russian COVID-19 Diplomacy in Africa: A Mixed Bag.”

¹⁸ Michlin-Shapir and Khvostunova, “The Rise and Fall of Sputnik V,” 19–20.

¹⁹ Michlin-Shapir and Khvostunova, “The Rise and Fall of Sputnik V,” 22–24.

²⁰ Michlin-Shapir and Khvostunova, “The Rise and Fall of Sputnik V,” 27.

²¹ John Hyatt, “How Putin Used Russia’s Sovereign Wealth Fund to Create a ‘State-Sponsored Oligarchy,’” Forbes, March 8, 2022, https://www.forbes.com/sites/johnhyatt/2022/03/08/sanctions-on-russian-fund-show-dashed-hope-of-moscows-cooperation-with-democracies/.

²² Hyatt, “How Putin Used Russia’s Sovereign Wealth Fund to Create a ‘State-Sponsored Oligarchy.’”

²³ Hyatt, “How Putin Used Russia’s Sovereign Wealth Fund to Create a ‘State-Sponsored Oligarchy,’”; Dylan Tokar and Kristin Broughton, “Russian Fund Behind Coronavirus Aid Shipment Is on U.S. Lending Blacklist,” Wall Street Journal, April 3, 2020, https://www.wsj.com/articles/russian-fund-behind-coronavirus-aid-shipment-is-on-u-s-lending-blacklist-11585873617. Links between former U.S. president Donald Trump’s administration and the RDIF have been controversial. Most notable was the January 11, 2017, meeting between Erik Prince (founder of the Blackwater private military company and the brother of Trump’s education secretary Betsy DeVos), Kirill Dmitriev (chief executive officer of the RDIF), and then UAE Crown Prince Mohamed bin Zayed in the Seychelles reportedly held in order to create a backchannel between Trump and Putin that became part of the basis for special prosecutor Robert Mueller’s investigation on interference in the 2016 U.S. presidential election. Dmitriev also met with Rick Gerson, a hedge fund manager and friend of Trump’s son-in-law and adviser Jared Kushner. Gerson had worked with Dmitriev on a proposal that he believed had Putin’s blessing, which was presented to Kushner and passed on to then-secretary of state Rex Tillerson before the 2017 presidential inauguration. See Shane Harris and Karoun Demirjian, “Congressional Democrats Examine Erik Prince’s Statements on 2017 Seychelles Meeting for Possible Perjury,” Washington Post, April 19, 2019, https://www.washingtonpost.com/world/national-security/congressional-democrats-examine-eriks-prince-statements-on-2017-seychelles-meeting-for-possible-perjury/2019/04/19/b7f888da-62cb-11e9-9412-daf3d2e67c6d_story.html.

²⁴ Tokar and Broughton, “Russian Fund Behind Coronavirus Aid Shipment Is on U.S. Lending Blacklist.”

²⁵ U.S. Department of the Treasury, “Treasury Prohibits Transactions With Central Bank of Russia”; and “RDIF Shrugs Off Geopolitical Risks and Co-Investment Partners Are Undeterred (GlobalSWF),” Global SWF, February 4, 2022, https://globalswf.com/news/rdif-shrugs-off-geopolitical-risks-and-co-investment-partners-are-undeterred.

²⁶ Hyatt, “How Putin Used Russia’s Sovereign Wealth Fund.”

²⁷ “Russian Direct Investment Fund and Mubadala Establish Co-Investment Program,” Mubadala, press release, June 21, 2013, https://www.mubadala.com/en/news/russian-direct-investment-fund-and-mubadala-establish-co-investment-fund; and “Abu Dhabi Sovereign Fund Pausing Russia Investments, CEO Says,” Reuters, March 28, 2022, https://www.reuters.com/business/abu-dhabi-sovereign-fund-mubadala-must-pause-russia-investments-ceo-says-2022-03-28/.

²⁸ Hyatt, “How Putin Used Russia’s Sovereign Wealth Fund.”

²⁹ Yaffa, “The Sputnik V Vaccine and Russia’s Race to Immunity,” 18.

³⁰ Michlin-Shapir and Khvostunova, “The Rise and Fall of Sputnik V,” 27–28.

³¹ Hyatt, “How Putin Used Russia’s Sovereign Wealth Fund.”

³² It was presumably Tikhonova who was the daughter that was vaccinated after Dmietriev’s wife received a dose. Yaffa, “The Sputnik V Vaccine and Russia’s Race to Immunity,” 21; and Isabelle Khurshudyan and Mary Ilyushina, “Putin’s Daugher Steps Into the Spotlight. But No One Will Acknowledge She’s Putin’s Daughter,” Washington Post, June 5, 2021, https://www.washingtonpost.com/world/europe/putin-daughter-russia-secret/2021/06/05/a5524c98-c2eb-11eb-89a4-b7ae22aa193e_story.html

³³ Michlin-Shapir and Khvostunova, “The Rise and Fall of Sputnik V,” 13.

³⁴ Michlin-Shapir and Khvostunova, “The Rise and Fall of Sputnik V,” 13.

³⁵ Human Vaccine sold Sputnik V to Hungary and Slovakia for the normal price, $10 per dose, according to the published contracts. See Wideroe and Tobiassen, “Sputnik for Sale.”

³⁶ 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. Per contract documents, Human Vaccine’s general manager is Alexander Chistyakov. According to a profile of him by the Organized Crime and Corruption Reporting Project (OCCRP), Chistyakov was an investment manager at Menatep Bank, which was involved in the loans-for-shares program as part of the post-Soviet privatization of state-owned assets, and later became an executive board member at the Russian state electricity company. Chistyakov and an offshore company he owns in the British Virgin Islands have featured prominently in the networks associated with various Russian “Laundromat” money laundering schemes. See “Alexander Chistyakov,” OCCRP, accessed May 17, 2022, https://www.occrp.org/en/troikalaundromat/profiles/alexander-chistyakov.

³⁷ Wideroe and Tobiassen, “Sputnik for Sale.”

³⁸ Sauer, Cordell, and Light, “A Royal Mark Up.”

³⁹ Sauer, Cordell, and Light, “A Royal Mark Up.”

⁴⁰ Sauer, Cordell, and Light, “A Royal Mark Up”; and Patrick Greenfield and Lorenzo Tondo, “Who Is the UAE Sheikh Behind Deals to Manage Vast Areas of African Forest?,” Guardian, November 30, 2023, https://www.theguardian.com/environment/2023/nov/30/who-is-the-uae-sheikh-behind-deals-to-manage-vast-areas-of-african-forest.

⁴¹ Sauer, Cordell, and Light, “A Royal Mark Up.”

⁴² Sauer, Cordell, and Light, “A Royal Mark Up.”

⁴³ Jake Cordell and Pjotr Sauer, “Kenya’s Failed Sputnik V Deal Used Emirati Resale Scheme,” Moscow Times, July 19, 2021, https://www.themoscowtimes.com/2021/07/19/kenyas-failed-sputnik-v-deal-used-emirati-resale-scheme-a74554.

⁴⁴ Sauer, Cordell, and Light, “A Royal Mark Up.”

⁴⁵ Sauer, Cordell, and Light, “A Royal Mark Up.”

⁴⁶ In addition to being the national security adviser, Sheikh Tahnoon bin Zayed al-Nahyan also chairs the UAE’s state holding company, ADQ, as well as First Abu Dhabi Bank (the largest lender in the UAE), International Holding Group (IHC), the Abu Dhabi Investment Authority sovereign wealth fund, and G42 (an artificial intelligence and cloud computing company). Royal Group controls 62 percent of IHC. As a signal of his influence, in May 2022, al-Nahyan greeted a U.S. delegation arriving at the airport—including U.S. Vice President Kamala Harris, the secretaries of state and defense, and the director of the Central Intelligence Agency—for the funeral of former Emirati Emir Sheikh Khalifa bin Zayed al-Nahyan. Isabel Debre and Jon Gambrell, “US Vice President, Top Officials Visit UAE to Pay Respects,” Associated Press, May 16, 2022, accessed July 30, 223, https://apnews.com/article/russia-ukraine-boris-johnson-dubai-kamala-harris-1e5dd077073d1ba96c1473a42586adc8; Bobby Ghosh and James Hertling, “Meet the UAE’s Royal Troubleshooter—and Maybe Next Big Boss,” Bloomberg, October 21, 2021, https://www.bloomberg.com/opinion/articles/2021-10-21/meet-uae-leader-sheikh-mohammed-s-new-royal-troubleshooter; Simeon Kerr, “Sheikh Tahnoon Named Chair of $790bn Abu Dhabi Sovereign Wealth Fund,” Financial Times, March 9, 2023, https://www.ft.com/content/9f965e4f-2447-4f28-8b18-75ddeee36c3e; and Simeon Kerr and Andrew England, “The UAE Business That Went From Obscurity to a $240bn Valuation in 3 Years,” Financial Times, January 8, 2023, https://www.ft.com/content/3690cc04-ff12-42f5-aa8d-26b5c185e99d.

⁴⁷ Sauer, Cordell, and Light, “A Royal Mark Up.”

⁴⁸ Sauer, Cordell, and Light, “A Royal Mark Up.”

⁴⁹ “Chimera Investment—Crunchbase Investor Profile & Investments,” Crunchbase, accessed May 18, 2022, https://www.crunchbase.com/organization/chimera-investment.

⁵⁰ Yousef Saba, “Abu Dhabi’s Chimera Closes Second Venture Capital Fund at $10 Bln,” Reuters, January 25, 2022, https://www.reuters.com/markets/funds/abu-dhabis-chimera-closes-second-venture-capital-fund-10-bln-2022-01-25/.

⁵¹ Mubadala, “Russian Direct Investment Fund and Mubadala Establish Co-Investment Program.”

⁵² SberInvest is a wholly owned subsidiary of Russia’s largest bank, PJSC Sberbank. “Mubadala, RDIF, and SberInvest Back Russian Data Center Operator IXcellerate,” Sovereign Wealth Fund Institute, January 25, 2022, https://www.swfinstitute.org/news/90911/mubadala-rdif-and-sberinvest-back-russian-data-center-operator-ixcellerate.

⁵³ Reuters, “Abu Dhabi Sovereign Fund Pausing Russia Investments, CEO Says.”

⁵⁴ “Guyana Seeking to Be UAE Hub—President,” Stabroek News, October 21, 2021, https://www.stabroeknews.com/2021/10/21/news/guyana/guyana-seeking-to-be-uae-hub-president/.

⁵⁵ Wideroe and Tobiassen, “Sputnik for Sale.”

⁵⁶ Sauer, Cordell, and Light, “A Royal Mark Up.”

⁵⁷ Michlin-Shapir and Khvostunova, “The Rise and Fall of Sputnik V,” 10.

⁵⁸ Amund Bakke Foss, Rolf J. Wideroe, and Harald Henden, “Ghana’s Minister of Power Signed Deal With a Man From Oslo Wanted for Fraud and Organized Crime. The Deal Is Worth 510 Million Dollars.,” VG, August 29, 2016, https://www.vg.no/i/Xynyb.

⁵⁹ Foss, Wideroe, and Henden, “Ghana’s Minister of Power Signed Deal With a Man From Oslo Wanted for Fraud and Organized Crime.” According to his official “private office” website, al-Maktoum touts various projects and relationships with high government officials from a wide variety of countries including Angola, Australia, Azerbaijan, Bangladesh, Burkina Faso, Cambodia, China, the Democratic Republic of the Congo, Equatorial Guinea, Gabon, Gambia, Guinea, Liberia, Mali, Mauritius Seychelles, Nigeria, Pakistan, the Republic of the Congo, Rwanda, Russia, and Somalia. Al-Maktoum’s website also notes meetings and partnerships with Fortescue Future Industries (also referred to as Fortescue Metals Group), an Australian mining company that signed a highly controversial mining deal with Afghanistan’s government in September 2020. The website does not mention Ameri Group or Umar Farooq Zahoor, however. Ahmad Sohaib Hasrat, “Govt-Fortescue Mining Agreement Sparks Concerns,” Pajhwok Afghan News, March 10, 2021, https://pajhwok.com/2021/03/10/govt-fortescue-mining-agreement-sparks-concerns/; and “Sheikh Ahmed Dalmook Al Maktoum,” accessed March 12, 2022, https://admoffice.ae/news?page=1.

⁶⁰ The deal also involved an extra $16 million per year for five years to be paid to the Ameri Group, and Ghana would pay for the gas that would power the turbines. If purchased directly from General Electric, each turbine would have cost $22 million. Foss, Wideroe, and Henden, “Ghana’s Minister of Power Signed Deal With a Man From Oslo Wanted for Fraud and Organized Crime.”

⁶¹ Fredrik Grønningsæter, “Finanscowboyen og sjeikens London-eventyr [The Financial Cowboy and the Sheik’s London Adventure],” Kapital, October 7, 2020, https://kapital.no/reportasjer/avsloring/2020/10/07/7571388/finanscowboy-per-morten-hansen-og-dubai-sjeik-tjener-ratt-pa-london-borsen.

⁶² Wideroe and Tobiassen, “Sputnik for Sale”; Grønningsæter, “The Financial Cowboy and the Sheik’s London Adventure”; Fredrik Grønningsæter, “Finanscowboyens Diamantfeber [The Financial Cowboy's Diamond Fever],” Kapital, June 2, 2020, https://kapital.no/reportasjer/avsloring/2020/06/02/7519083/finanscowboyens-diamantfeber.

⁶³ “Abramovich Family Rumoured to Be Eyeing FC Copenhagen,” Copenhagen Post, December 17, 2010, https://web.archive.org/web/20101217091801/http://www.cphpost.dk/sport/sport/50589-abramovich-family-rumoured-to-be-eyeing-fc-copenhagen.html; and Wideroe and Tobiassen, “Sputnik for Sale.”

⁶⁴ Wideroe and Tobiassen, “Sputnik for Sale;” and “Sentenced to Prison for Serious Money Laundering,” Norway Posts English, March 9, 2023, https://norway.postsen.com/local/97901/Sentenced-to-prison-for-serious-money-laundering.html.

⁶⁵ Zahoor’s partner in the crime has admitted to her involvement and said that Zahoor was her accomplice. See Foss, Wideroe, and Henden, “Ghana’s Minister of Power Signed Deal With a Man From Oslo Wanted for Fraud and Organized Crime.”

⁶⁶ Wideroe and Tobiassen, “Sputnik for Sale.”

⁶⁷ Foss, Wideroe, and Henden, “Ghana’s Minister of Power Signed Deal With a Man From Oslo Wanted for Fraud and Organized Crime”; Wideroe and Tobiassen, “Sputnik for Sale.” In May 2023, Zahoor was acquitted in both cases by a Pakistani court. This is partly due to Zahoor having diplomatic immunity because he is Liberia’s “Ambassador at Large.” “Umar Farooq Zahoor Acquitted in Two Fabricated Money-Laundering Cases Made by Shahzad Akbar, Sophia Mirza,” Pakistan Observer, May 13, 2023, https://pakobserver.net/umar-farooq-zahoor-acquitted-in-two-fabricated-money-laundering-cases-made-by-shahzad-akbar-sophia-mirza/; Murtaza Ali Shah, “Fallen Marriage, Interpol, and Red Notices: How Businessman Umar Farooq Zahoor Became Entangled with FIA over Ex-Wife’s Complaint?,” June 26, 2022, https://www.geo.tv/latest/424629-fallen-marriage-interpol-and-red-notices-how-businessman-umar-farooq-zahoor-became-entangled-with-fia-over-ex-wifes-complaint; and Murtaza Ali Shah, “Judge Throws Out FIA’s Case Against Umar Farooq Zahoor,” February 25, 2023, https://www.geo.tv/latest/472803-judge-throws-out-fias-case-against-umar-farooq-zahoor.

⁶⁸ Zahoor’s LinkedIn page states that from November 2016 to present, he has been the “Former Director, Ameri Group UAE.” His LinkedIn page also says that “Mr. Umar Farooq Zahoor has won so many awards over the years for being the best Norwaiagn-Pakistani [sic] businessman.” “Liberia: New Dubai Billionaire Investor Has ‘Controversial Past’ in Ghana,” West African Journal Magazine, March 13, 2019, https://westafricanjournalmagazine.wordpress.com/2019/03/12/2749/; and Umar Farooq Zahoor, “Umar Farooq Zahoor,” LinkedIn, accessed March 12, 2022, https://www.linkedin.com/in/umar-farooq-zahoor/.

⁶⁹ Wideroe and Tobiassen, “Sputnik for Sale.”

⁷⁰ Shah, “Fallen Marriage, Interpol, and Red Notices”; Pakistan Observer, “Umar Farooq Zahoor Acquitted in Two Fabricated Money-Laundering Cases Made by Shahzad Akbar, Sophia Mirza.”

⁷¹ The lawyer represents Morten, Seagal, and Zahoor in this matter. See Wideroe and Tobiassen, “Sputnik for Sale.”

⁷² Grønningsæter, “The Financial Cowboy and the Sheik’s London Adventure.”

⁷³ Wideroe and Tobiassen, “Sputnik for Sale.”

⁷⁴ Wideroe and Tobiassen, “Sputnik for Sale”; and H.H. Ahmed Bin Dalmook Bin Juma Al Maktoum, “UPDATE: Ameri Group Llc Rejects False and Malicious Claim Made by Vg of Norway,” Open Source Investigations (blog), December 17, 2015, https://www.opensourceinvestigations.com/ghana/update-ameri-group-llc-rejects-false-and-malicious-claim-made-by-vg-of-norway/.

⁷⁵ Sauer, Cordell, and Light, “A Royal Mark Up.”

⁷⁶ Wideroe and Tobiassen, “Sputnik for Sale.”

⁷⁷ Wideroe and Tobiassen, “Sputnik for Sale.”

⁷⁸ Wideroe and Tobiassen, “Sputnik for Sale.”

⁷⁹ Stronski, “Russian COVID-19 Diplomacy in Africa: A Mixed Bag.”

⁸⁰ Michlin-Shapir and Khvostunova, “The Rise and Fall of Sputnik V,” 33.

⁸¹ “Covid: Stalled Russian Vaccines Cause Global Anger,” BBC News, July 29, 2021, https://www.bbc.com/news/world-europe-58003893.

⁸² Michlin-Shapir and Khvostunova, “The Rise and Fall of Sputnik V,” 34.

⁸³ BBC News, “Covid”; and “Guatemala Asks Russia to Return Money Over Failure to Deliver Sputnik Covid-19 Vaccine,” Reuters, June 29, 2021, https://www.reuters.com/business/healthcare-pharmaceuticals/guatemala-asks-russia-return-money-over-failure-deliver-sputnik-covid-19-vaccine-2021-06-29/.

⁸⁴ BBC News, “Covid”; and Danny Ramos, “Bolivia’s Arce to Take Russia’s Sputnik V Vaccine in Show of Confidence,” Reuters, January 14, 2021, https://www.reuters.com/article/us-health-coronavirus-russia-bolivia-vac/bolivias-arce-to-take-russias-sputnik-v-vaccine-in-show-of-confidence-idUSKBN29J2XQ.

⁸⁵ BBC News, “Covid.”

⁸⁶ BBC News, “Covid.”

⁸⁷ “Ghana: Sheikh Al Maktoum Refunds U.S.$2.4 Million to Ghana After Botched Sputnik V Deal,” AllAfrica, August 12, 2021, https://allafrica.com/stories/202108130673.html.

⁸⁸ AllAfrica, “Ghana”; Stronski, “Russian COVID-19 Diplomacy in Africa: A Mixed Bag.”

⁸⁹ Stronski, “Russian COVID-19 Diplomacy in Africa: A Mixed Bag.”

⁹⁰ There are varying explanations for what happened to the contract. In response to Forbes, the RDIF stated that it never had a contract with the San Juan province of Argentina. In contrast, a third-level intermediary in the vaccine deal, Panamanian company PMB Negocios SA, said RuL AG had guaranteed that the doses made by Russian pharmaceutical company Pharmstandard existed and that Pharmstandard had the authorization from the Gamaleya Research Institute to provide the vaccine and that Pharmstandard had only been waiting for the San Juan province to send the planes and proper documentation in order to export the vaccines. This provincial contract was separate from a contract for Sputnik V made by the Argentine federal government. See Agustino Fontevecchia, “Vaccine Mercenaries: One Million Doses of Sputnik V and 18 Million Euros,” Forbes, August 10, 2021, https://www.forbes.com/sites/afontevecchia/2021/08/10/one-million-doses-of-sputnik-v-and-18-million-euros/; and Brenda Funes, “Dejaron a San Juan Sin un Millon de Sputnik V y Ahora la Provincia Quiere Recuperar 18 Millones de Euros [They Left San Juan Missing a Million Doses of Sputnik V and Now the Province Wants to Recover 18 Million Euros],” Perfil, July 30, 2021, https://www.perfil.com/noticias/politica/san-juan-se-perdio-un-millon-de-sputnik-v-y-quiere-recuperar-18-millones-de-euros.phtml.

⁹¹ Agustino Fontevecchia, “Vaccine Mercenaries.”

⁹² Fontevecchia, “Vaccine Mercenaries.”

⁹³ Stronski, “Russian COVID-19 Diplomacy in Africa: A Mixed Bag”; Manuela Andreoni and Bryan Pietsch, “Brazil's Health Authority Rejects Importing Russia’s Sputnik V Vaccine,” New York Times, April 26, 2021, https://www.nytimes.com/2021/04/26/world/covid-vaccine-brazil-russia-sputnik.html; and Maayan Hoffman, “How Russia’s Ukraine Invasion Doomed the Sputnik V Coronavirus Vaccine,” Washington Post, April 9, 2022, https://www.washingtonpost.com/health/2022/04/09/russia-sputnik-vaccine-rejected/.

⁹⁴ Hoffman, “How Russia’s Ukraine Invasion Doomed the Sputnik V Coronavirus Vaccine.”

⁹⁵ U.S. Department of the Treasury, “Treasury Prohibits Transactions with Central Bank of Russia.”

⁹⁶ “RDIF Statement,” Sputnik V, accessed May 2, 2022, https://sputnikvaccine.com/newsroom/pressreleases/rdif-statement-28/.

⁹⁷ Sputnik V, “RDIF Statement.”.

⁹⁸ Paul Webster, “Russian COVID-19 Vaccine in Jeopardy After Ukraine Invasion,” Nature Medicine, March 15, 2022, https://doi.org/10.1038/d41591-022-00042-y.

⁹⁹ Hoffman, “How Russia’s Ukraine Invasion Doomed the Sputnik V Coronavirus Vaccine.”

Sovereign wealth funds come in different shapes and sizes. While some act as savings and stabilization funds, others function as strategic investment funds that make equity investments or as national development banks that create loans. In contrast, Türkiye’s sovereign wealth fund, Türkiye Wealth Fund (TWF), primarily falls into the category of a state-owned fund that holds shares in state-owned enterprises.

When TWF started its operations in 2016 with a founding capital of merely $15.6 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.¹ Eight years on, TWF has become a telling case: Turkish President Recep Tayyip Erdoğan has used the fund 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. And TWF has failed to demonstrate any value-added by transferring state shares of various enterprises from the Treasury to the sovereign wealth fund. On the contrary, TWF’s takeover of these enterprises and assets has received repeated criticism for exacerbating Türkiye’s transparency, accountability, and governance deficits.

The Motive: The Rush to Consolidate Political and Economic Power

The draft bill that fifteen lawmakers of Türkiye’s ruling Justice and Development Party (AKP) submitted to the Turkish parliament in August 2016 to establish a sovereign wealth fund could not have come at a more awkward time.² Less than a month before, a rogue faction within the Turkish military failed to overthrow the government in a bloody coup attempt that left nearly 300 dead and thousands injured.³ Thus, the Turkish government’s rush to establish a sovereign wealth fund in the midst of a draconian state of emergency and without relevant stakeholder deliberations likely had more to do with Erdoğan’s need to consolidate his political and economic power.⁴ The envisioned TWF would bring state-owned enterprises and their assets more firmly under the presidential office’s direct control.

As documented in the TWF timeline in figure 1,⁵ on July 27, 2016—only twelve days after the failed coup attempt—Türkiye’s Council of Ministers decided to prepare a government proposal to set up a sovereign wealth fund and submitted its draft to parliament five days later as part of a much larger omnibus bill.⁶ After pushback by opposition lawmakers against using such an omnibus bill to establish a sovereign wealth fund, the government walked back and hastily made arrangements to resubmit the proposal as a draft bill.⁷ A new, final bill was rushed through parliament and passed on August 19,⁸ coming into effect on August 26.⁹

The Revenue Deficit: The Scramble for Resources

The key challenge TWF faced at the outset was finding the funds to manage. Although the founding capital of TWF was only $15.6 million, Türkiye’s then finance minister Nihat Zeybekçi said in August 2016 that the Turkish government’s target was to manage $200 billion “as soon as possible,” although he did not specify from where such a sum would come.¹⁰ (Türkiye, which imported 99 percent of its gas and 93 percent of its oil as of 2020, suffers from a chronic trade deficit.¹¹)

Furthermore, since the country had not had a budget surplus since 1970, there was neither commodity export revenue nor a budget surplus that the government could provide to TWF.¹²

In the absence of any viable revenue stream, the Turkish government transferred state-owned enterprises and assets to TWF. In January 2017, the government issued a state-of-emergency decree to hand over the national lottery and betting rights to the fund.¹³ The next month, the government used another state-of-emergency decree to transfer its holdings in the country’s most valuable publicly owned companies to TWF.¹⁴ This transfer included the 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.

The transfers moved many of Türkiye’s most valuable assets more firmly under Erdoğan’s direct control. As a result, TWF not only gives Erdoğan—who appointed himself the TWF chair in September 2018—greater control over the management, finances, and appointments at state-owned enterprises but also the ability to evade the oversight of Türkiye’s parliament and the Court of Accounts.¹⁵

The transfers also drew criticism from experts. Refet Gürkaynak, one of Türkiye’s leading economists, criticized the government’s move by saying, “A wealth fund is established to utilize public resources that grow with budget surpluses. Ours is to squander public capital that has been accumulated in the past.”¹⁶ He added, “The establishment of a wealth fund for Turkey, which does not have a budget surplus, is like getting a lighthouse for landlocked Ankara.”

In April 2020, TWF acquired all shares of Türkiye’s public insurance and pension companies for $938 million.¹⁷ As of October 2023 the fund stated on its website that its portfolio includes a range of domestic assets, including “30 companies, 2 [betting] licenses and real estates in 7 sectors,” with 79 percent in financial services, 9 percent in transport and logistics, 7 percent in energy, and 4 percent in technology and telecom.¹⁸ Through these acquisitions, TWF amassed $240 billion in assets, including $33 billion in equity, by the end of 2019.¹⁹ According to the Sovereign Wealth Fund Institute, TWF’s assets exceeded $279 billion as of 2023.²⁰

Meanwhile, the Turkish government turned TWF into a collateral instrument to take out additional loans despite the country’s already sizable debt burden of around $450 billion; there was a need to refinance $170 billion in mainly dollar-denominated loans in 2022 alone.²¹ TWF’s first attempt to borrow funds in October 2017—a ten-year loan of $5 billion from the Industrial and Commercial Bank of China—did not materialize.²² But in March 2019, the fund received its first syndicated loan of 1 billion euros ($1.13 billion) for a two-year term via a consortium of ten banks.²³ The following year, TWF availed the services of four international lenders for its debut Eurobond sale.²⁴ In March 2021, the fund took advantage of the government’s guarantee on 95 percent of the facility to refinance its 2019 loan with a 1.25 billion euro ($1.49 billion) syndicated loan, increasing the number of participants to fourteen banks from eleven countries.²⁵

During the brief deliberations on TWF at the Turkish parliament in 2016, Türkiye’s opposition politicians warned about the risks that would be posed by TWF emerging as an alternative institution for taking out sovereign debt—competing with the ability of not only the Treasury but also private corporations to access local and international capital markets.²⁶ In January 2021, the Turkish daily Sözcü reported, “The wealth fund turned into a debt fund.”²⁷ One of the finance experts quoted in the piece warned that TWF, which would have already gone bankrupt if it were a private entity, had turned into a second Treasury, whose constant need for loans was unsustainable.

The use of TWF as part of a flurry of international borrowing has coincided with the downgrade of the country’s sovereign debt. In September 2016, less than a month after TWF’s establishment, credit ratings agency Moody’s downgraded Türkiye’s sovereign credit rating from investment grade Baa3 to noninvestment grade Ba1, citing concerns about the erosion of the rule of law following the country’s abortive coup.²⁸ Two years later, Moody’s cut the country’s credit rating further, citing Ankara’s increasing reliance on external capital flows and rising risk of government default.²⁹

TWF’s bond rating has also suffered. In December 2021, the global rating agency Fitch revised its outlook on TWF from stable to negative, rating it BB-, which implies “an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time.”³⁰ The continued decline in TWF’s credit ratings, alongside Türkiye’s sovereign credit rating, will make it more challenging and costly for TWF to find the additional loans required to roll over its debt and keep the fund afloat.

Such financial headwinds were one of the reasons behind what Bloomberg reported as TWF’s reluctance to “rely on the bond market or use its own cash” to finance its controversial January 2022 attempt to buy a majority stake at Turk Telekom, the country’s second-largest telecom company.³¹ TWF’s interest in Turk Telekom first became public in September 2021, which Bloomberg analysts presented as the latest episode of the “creeping re-nationalization of Turkey’s telecommunications industry.”³² Fifty-five percent of Turk Telekom’s shares were under the control of a consortium of Türkiye’s leading banks, who had taken over the company in December 2018 following a massive default.³³

The Turkish government owned only a minority share, but it exerted outsized control over Turk Telekom through its ownership of what investors call a “golden share,” which allowed the government to veto any change in Turk Telekom’s management or sale.³⁴ Hence, when TWF approached private lenders (who together held 55 percent of the company’s shares) with a request for loans for TWF’s planned buyout of those very same banks’ shares, TWF was making demands from a position of immense political and economic power. The banks have a strong interest in resolving what Bloomberg calls “the years-long saga surrounding the ownership structure” at Turk Telekom and closing the chapter on the biggest nonperforming loan in Turkish history, which poses significant financial risks to the banks’ profitability.³⁵

The power Erdoğan and TWF had to hurt these banks financially (through the government’s golden share at Turk Telekom) provided TWF with significant leverage to persuade the banks to provide a $1.6 billion loan on favorable terms to TWF.³⁶ The fund then purchased the banks’ shares in Turk Telekom in March 2022. This move set a controversial precedent for financing the TWF through not only syndicated loans from international financial institutions but also loans from local banks. These banks had to offer favorable terms on loans and sales, including “a two-year payment-free grace period with repayment over the following four years.”³⁷

The Governance Deficit: A Family Enterprise

When TWF was accepted as a member of the International Forum of Sovereign Wealth Funds (IFSWF) less than nine months after its establishment, TWF’s then chairman Mehmet Bostan claimed that “admission to a prestigious international community such as IFSWF is an indication that [the fund’s] management structure and transparency has been designed using the world’s best governance principles.”³⁸ TWF’s membership in the IFSWF, however, was merely a fig leaf that failed to hide the governance and transparency deficit marring the fund since its launch. The Linaburg-Maduell Transparency Index developed at the Sovereign Wealth Fund Institute in 2008 recommends a minimum rating of 8 out 10 for a sovereign wealth fund to claim “adequate transparency,”³⁹ and TWF is rated a 6 out of 10. Although this rating places TWF above nineteen other sovereign wealth funds in an index of fifty-two funds worldwide, the fund has long been marred by inadequate transparency, arbitrary rule, and a severe lack of accountability.

The composition of TWF’s board highlights the potential conflicts of interest and close links with the Erdoğan regime. Though the Turkish government reportedly worked with international executive search firms to recruit senior bankers for senior TWF board positions,⁴⁰ its initial board appointed in 2017 nonetheless demonstrated a meritocracy deficit. One of the five board members was Erdoğan’s senior adviser Yiğit Bulut, a controversial figure who alleged at the height of the 2013 Gezi Park protests—countrywide protests that shook the Erdoğan regime—that foreign powers tried to kill the Turkish leader by telekinesis.⁴¹ He also claimed that Germany’s flag carrier Lufthansa was behind a conspiracy to provoke mass protests in Türkiye to eliminate competition from Turkish Airlines.⁴² Although the other four board members were two finance professionals and two academics known for their loyalty to the government, Erdoğan’s desire for more direct control led to a complete reshuffle in less than two years.

In September 2018, three months after becoming executive president under Türkiye’s newly launched presidential system, Erdoğan removed the entire TWF board from office and appointed himself as chairman of TWF.⁴³ He also designated his son-in-law Berat Albayrak—whom he had appointed as minister of treasury and finance two months earlier—as his deputy at the fund.⁴⁴ Another board member appointed by Erdoğan was Erişah Arıcan, who was Albayrak’s PhD thesis adviser and—according to Albrayrak’s leaked emails—drafted his doctoral thesis on his behalf.⁴⁵ As opposition presidential contender Muharrem İnce remarked, “The man who has captured the state . . . has now taken public companies prisoners.”⁴⁶ As another opposition politician, Selin Sayek-Böke, has noted, TWF is “essentially a family company” through which the Turkish “people’s property, the nation’s income is taken out of the budget and transferred to the (presidential) palace’s company.”⁴⁷

In November 2020, Albayrak left his position in TWF—three weeks after his resignation as minister of treasury and finance amid rumors of a rift with his father-in-law Erdoğan.⁴⁸ The nepotism and political favoritism demonstrated in TWF’s board appointments, and the possible conflicts of interests involved, not only represent an abuse of public position for private gain but also hurt the public since these individuals are not able to fully perform their fiduciary duties in the best interest of the Turkish taxpayers.

The Accountability Deficit: Top-Secret Public Finances

In addition to potential conflicts of interest in its leadership, newly established secrecy rules regarding TWF hamper public transparency and accountability. The Turkish parliament has the constitutional right to oversee all enterprises where the state directly or indirectly controls at least half the shares. Nonetheless, in January 2021, when the Turkish parliament’s Plan and Budget Committee convened to deliberate on TWF’s annual audit report prepared by the State Supervisory Council, the report included a “secret” designation, in contrast to the report’s earlier public iterations.⁴⁹ This meant that if parliamentarians were to make any statements about the report in a public committee hearing, they could potentially land in court for breaching official secrets. Consequently, several opposition members of the committee left the January meeting, protesting that proper parliamentary oversight of TWF under these conditions was not possible.⁵⁰

TWF is also exempt from oversight by Türkiye’s Court of Accounts, which issues public audit reports. Instead, independent audits are conducted by a company of TWF’s choice. Meanwhile, Türkiye’s government officials, as reported by Bloomberg, have been trumpeting “the formation of such a large pool of capital outside the budget as a kind of cure-all, piquing investor interest with pledges to use it for everything from defending the lira and buoying the stock market to recapitalizing banks and cutting borrowing costs.”⁵¹ Experts therefore continue to warn about the potential risks of such opaque and unaccountable interventions in Türkiye’s financial markets. They cite the ways in which TWF hurts the country’s private sector, including by undermining competition through the provision of unfair advantages to companies under its control and by raising borrowing costs for others, thus exacerbating financial volatility rather than curbing it.⁵²

Conflicts of Interest: Settling Political Scores

Türkiye’s largest mobile phone company Turkcell is one case that best illustrates the conflicts of interest and how the Erdoğan government has used TWF to settle political scores and consolidate power.⁵³ On June 28, 2020, TWF disclosed its intent to acquire 26.2 percent of Turkcell’s shares by entering agreements with four firms: Sweden’s multinational telecommunications firm, Telia Company; Russian billionaire Mikhail Fridman’s LetterOne;⁵⁴ then Turkish billionaire Mehmet Emin Karamehmet’s Çukurova Holding;⁵⁵ and Türkiye’s largest public lender, Ziraat Bank.⁵⁶

Exhausted by what Bloomberg called a “15-year-old feud for control” over Turkcell that resulted in “spats over board representation, dividends, and other issues,” Telia Company sold its 24 percent indirect share in Turkcell for $530 million.⁵⁷ This dollar figure represented a 54 percent discount compared to Turkcell’s market value and amounted to a $322 million loss for Telia.⁵⁸

What prompted the Swedish company to exit Turkcell at a loss was a bitter campaign Erdoğan had been waging against Türkiye’s secular business elites since his Islamist-rooted party, the AKP, came to power in 2002, long before the establishment of TWF.

Çukurova Holding is a Turkish conglomerate with subsidiaries in industrial, construction, information, and communication technologies as well as media, transportation, trade, energy, and financial services.⁵⁹ In 2011, Forbes Turkey listed Çukurova Holding’s chairman, Mehmet Emin Karamehmet—a pro-secular and liberal figure—as Türkiye’s richest man, with a net worth of $4 billion.⁶⁰ That year, however, the Wall Street Journal reported that Karamehmet was “fighting to survive” as he struggled with the financial and legal fallout from Türkiye’s 2001 banking crisis and the AKP’s growing pressure on pro-secular media bosses.⁶¹ Karamehmet was not only battling “Swedish and Russian shareholders to keep his stake in Turkcell” but also fighting “a nearly 12-year prison sentence for fraud” and the government’s freezing of “$1 billion of [Çukurova Holding’s] assets as collateral for allegedly unpaid taxes.” In 2015, Forbes reported that his net worth had declined to $1.15 billion and dropped him from its billionaires list the following year.⁶²

Erdoğan’s efforts to solidify his control over the country’s leading telecommunications company while also sidelining a secular businessperson culminated with TWF’s acquisition of Turkcell shares in 2020. The resulting reshuffle allowed Erdoğan to appoint five out of Turkcell’s nine board members.⁶³ This was made possible when Ziraat Bank, fully owned by TWF, received Karamehmet’s shares in exchange for the $1.6 billion debt Karamehmet’s companies owed to the public lender.⁶⁴

As a result of Karamehmet’s deal with Ziraat Bank, TWF needed to pay “$1.6 billion to Ziraat Bank and $530 million to Telia,” a sum that would have forced the fund to issue debt securities, since that amount was not available in its coffers.⁶⁵ Five months later, TWF sold 10 percent of the Borsa Istanbul stock exchange to the Qatari sovereign wealth fund for $200 million in another opaque deal criticized by the Turkish opposition.⁶⁶ (Qatari Emir Sheikh Tamim bin Hamad Al Thani is one of Erdoğan’s closest political allies.⁶⁷)

When TWF relieved Ziraat Bank of its nonperforming $1.6 billion loan to Karamehmet’s companies, it also injected about $3 billion into Ziraat alongside two other Turkish public lenders.⁶⁸ Since TWF was cash-strapped, it turned to borrowing from these three public lenders to fund its cash injections into the very same banks, as disclosed by TWF’s May 2020 plans to “issue debt securities” for state-owned banks to “purchase at market price.”⁶⁹ It appears that Ziraat Bank’s purchase of TWF’s debt securities, which in turn funded a capital injection in Ziraat Bank, also helped TWF relieve Ziraat Bank of its $1.6 billion nonperforming loan to Turkcell. What made this government attempt to solidify control over Turkcell even more controversial was an apparent conflict of interest of one of the key decisionmakers in the process: Hüseyin Aydın, then chief executive officer of Ziraat Bank, who also sat on the boards of TWF and Turkcell; all three entities were involved in this troubling chain of financial transactions.

Meanwhile, Turkcell shares acquired from Telia and Karamehmet’s Cukurova Finance were placed with a new subsidiary of TWF instead of with the sovereign wealth fund itself.⁷⁰ That subsidiary, TVF Bilgi Teknolojileri İletişim Hizmetleri Yatırım Sanayi ve Ticaret Anonim Şirketi (TVF BTIH), is an Istanbul-based joint stock company established on June 5, 2020, with a registered capital of only 5 million Turkish liras ($740,000). Thus, a company with less than $1 million of registered capital came to control Turkcell, which had a market capitalization of $4.2 billion as of August 2023.⁷¹

As part of this new structure, a new class of privileged shares was created, comprising 15 percent of Turkcell’s total shares. These are owned entirely by TWF through TVF BTIH and grant TWF the power to elect five out of nine members of Turkcell’s board. TWF claims this will improve governance and protect minority shareholders.⁷² This assertion is highly questionable. The Turkish government’s majority control of the board does not reassure minority shareholders, whose concerns about corporate governance deficits were exacerbated by the irregularities and conflicts of interest resulting from the various dealings among TWF, Ziraat Bank, and Turkcell.

The governance deficit at TWF-controlled Turkcell again made headlines in January 2022, when Fridman’s LetterOne, the second-largest shareholder at Turkcell after TWF with 19.8 percent of the shares, called for a board reshuffle.⁷³ LetterOne’s push for a governance overhaul included a proposal to appoint four unaffiliated board members to replace Erdoğan’s political appointees, three of whom lacked competences in the telecommunications field; this was a move aimed at attracting international investors. LetterOne’s latest call followed earlier attempts in November 2021 to encourage the board to enact changes, including “setting up a new board committee to review costs, asset monetization, and capital allocation.”⁷⁴ LetterOne Managing Director Ben Babcock expressed his frustration by stating, “We sought to engage constructively with the Turkcell board to address our legitimate concerns but the board has chosen not to engage with us.”⁷⁵ This provides further evidence of the governance problems haunting TWF-controlled Turkcell.

Conclusion: TWF, A Showcase of Worst Practices

The transfer of state shares from the Turkish Treasury to TWF has exacerbated Türkiye’s transparency, accountability, and governance deficits. TWF’s financial transactions and corporate manipulation have caused far-reaching economic problems and raised concerns over possible mismanagement and corruption.

Furthermore, the Turkish president’s use of TWF for political gain—rewarding clients, manipulating transactions, assigning board members, and shielding policies from parliamentary oversight and audit—highlights the potential for a sovereign wealth fund to be manipulated and stresses the need for greater transparency and oversight.

None of these developments should come as a surprise. Shortly after the establishment of TWF, a Turkish journalist warned that the fund could end up being a “poverty fund,” triggering an economic crisis rather than preventing one.⁷⁶ Since 2018, the Turkish lira has lost three-quarters of its value against the U.S. dollar, and inflation has reached 80 percent as of August 2022.⁷⁷ As prices skyrocketed, the New York Times reported that scores of Turkish citizens were lining up in long queues to buy government-subsidized bread, as people’s “salaries and pensions no longer cover even the staples of life.”⁷⁸

The problematic role TWF plays in the Turkish economy goes hand in hand with Erdoğan’s unorthodox economic experiment that tries to lower inflation by lowering interest rates.⁷⁹ And, meanwhile, corruption in the country is increasing, as evidenced by the country’s dramatic decline in rank from 54 to 101 in the Corruption Perceptions Index of Transparency International within the last decade.⁸⁰ TWF is therefore emblematic of a larger malaise in Türkiye, as rising authoritarianism undermines democratic governance, transparency, accountability, free markets, and a rules-based economy.

Thus, during its first five years in action, TWF hurt the Turkish economy rather than attracting capital and boosting the country’s development. As of 2020, the Erdoğan government’s financial mismanagement had already prompted the most significant outflows from Türkiye’s debt and equity markets in more than a decade and dried up foreign direct investment from Ankara’s traditional economic partners in the West.⁸¹ The London-based chief economist of a global investment bank stated in October 2021 that Türkiye had become “an irrelevance to global emerging market investors” since the country comprised only “0.2% of the Global Emerging Market MSCI equity index.”⁸² MSCI, the world’s largest index provider, warned the previous year that it was considering ejecting Türkiye from its emerging market index and reclassifying the country as a “frontier” or “standalone” market.⁸³

The case of TWF highlights how poor governance and transparency can exacerbate state capture and create further debt burdens that current and future citizens must bear. Ultimately, TWF, instead of pushing an emerging market economy closer to the level of a developed economy, has acted as the final nail in the coffin. Türkiye remains a struggling emerging market economy, with much less appeal to foreign investors. And it therefore greatly risks relegation, as its transparency, accountability, and governance deficits resemble those of a frontier market economy more and more with each passing day.

Notes

¹ 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.

² “Sıra Sayısı: 413 Adalet ve Kalkınma Partisi Grup Başkanvekili Kayseri Milletvekili Mustafa Elitaş ve Isparta Milletvekili Süreyya Sadi Bilgiç ile 14 Milletvekilinin Türkiye Varlık Fonu Kurulması ile Katma Değer Vergisi Kanunda Değişiklik Yapılmasına Dair Kanun Teklifi (2/1319) ile Plan ve Bütçe Komisyonu Raporu [Ordinal Number: 413 Justice and Development Party Group Deputy Chairman and Kayseri Member of Parliament Mustafa Elitaş and Isparta Member of Parliament Süreyya Sadi Bilgiç With 14 Members of Parliament and the Establishment of Turkey Sovereign Wealth Fund With the Law Related to the Value-Added Tax Proposal (2/1319) Plan and Budget Commission Report],” Grand National Assembly of Türkiye, accessed January 26, 2022, https://www5.tbmm.gov.tr/sirasayi/donem26/yil01/ss413.pdf.

³ Ned Levin, “Turkey Declares Coup Attempt Over as Crackdown Widens,” Wall Street Journal, July 17, 2016, https://www.wsj.com/articles/turkey-widens-crackdown-after-coup-attempt-1468761724.

⁴ Aykan Erdemir, “Erdogan Builds a Parallel Budget,” Foundation for Defense of Democracies, February 10, 2017, https://www.fdd.org/analysis/2017/02/10/erdogan-builds-a-parallel-budget/.

⁵ Sonmez, “Under Financial Strains, Turkey Designs ‘Parallel Budget’”; “Sıra Sayısı: 413 Adalet ve Kalkınma Partisi Grup Başkanvekili Kayseri Milletvekili Mustafa Elitaş ve Isparta Milletvekili Süreyya Sadi Bilgiç ile 14 Milletvekilinin Türkiye Varlık Fonu Kurulması ile Katma Değer Vergisi Kanunda Değişiklik Yapılmasına Dair Kanun Teklifi (2/1319) ile Plan ve Bütçe Komisyonu Raporu [Ordinal Number: 413 Justice and Development Party Group Deputy Chairman and Kayseri Member of Parliament Mustafa Elitaş and Isparta Member of Parliament Süreyya Sadi Bilgiç With 14 Members of Parliament and the Establishment of Turkey Sovereign Wealth Fund With the Law Related to the Value-Added Tax Proposal (2/1319) Plan and Budget Commission Report]”; “Türkiye Varlık Fonu Yönetimi Anonim Şirketinin Kurulması İle Bazı Kanunlarda Değişiklik Yapılmasına Dair Kanun [The Law on the Amendment of Certain Laws with the Establishment of the Turkey Wealth Fund Management Corporation],” Grand National Assembly of Türkiye, August 19, 2016, https://www5.tbmm.gov.tr/kanunlar/k6741.html; “Kanun: Türkiye Varlık Fonu Yönetimi Anonim Şirketinin Kurulması İle Bazı Kanunlarda Değişiklik Yapılmasına Dair Kanun [Law: The Law on the Amendment of Certain Laws with the Establishment of the Turkey Wealth Fund Management Corporation],” Official Gazette, August 26, 2016, https://www.resmigazete.gov.tr/eskiler/2016/08/20160826-1.htm; “License for Games of Chance Transferred to Wealth Fund,” Daily Sabah, January 9, 2017, https://www.dailysabah.com/business/2017/01/09/license-for-games-of-chance-transferred-to-wealth-fund; Ercon Ersoy, “Turkey Plans Massive Transfer of Assets to State Wealth Fund,” Bloomberg, February 6, 2017, https://www.bloomberg.com/news/articles/2017-02-06/turkey-plans-massive-transfer-of-assets-to-sovereign-wealth-fund; Onur Ant, “Erdogan Names Himself Turkey Wealth Fund Chairman in Shakeup,” Bloomberg, September 12, 2018, https://www.bloomberg.com/news/articles/2018-09-12/erdogan-names-himself-chairman-of-turkey-wealth-fund-in-overhaul; Ebru Tuncay, Ceyda Caglayan, and Daren Butler, “Turkish Insurance Shares Jump After Wealth Fund Takeover,” Reuters, April 24, 2020, https://www.reuters.com/article/turkey-insurance/turkish-insurance-shares-jump-after-wealth-fund-takeover-idUSL5N2CC2X4; “Turkey Wealth Fund: Sovereign Wealth Fund in Turkey, Middle East,” Sovereign Wealth Fund Institute, accessed August 1, 2023, https://www.swfinstitute.org/profile/598cdaa60124e9fd2d05c184; “Turkey Wealth Fund Receives EUR 1 Billion Syndication Loan,” Turkey Wealth Fund, March 7, 2019, https://www.tvf.com.tr/en/contact/disclosures/2019/turkey-wealth-fund-receives-eur-1-billion-syndication-loan; Kerim Karakaya and Asli Kandemir, “Turkey Wealth Fund Hires HSBC, Citi, ICBC for Debut Eurobond,” Bloomberg, September 30, 2020, https://www.bloomberg.com/news/articles/2020-09-30/hsbc-icbc-citi-hired-for-turkish-wealth-fund-s-debut-eurobond; Kerim Karakaya and Cagan Koc, “Turkey Set to Borrow Around $1.6 Billion for Turk Telekom Buyout,” Bloomberg, March 9, 2022, https://www.bloomberg.com/news/articles/2022-03-09/turkey-set-to-borrow-around-1-6-billion-for-turk-telekom-buyout; “Türkiye Wealth Fund Receives EUR 1.25 Billion Syndicated Loan,” Turkey Wealth Fund, March 24, 2021, https://www.tvf.com.tr/en/contact/disclosures/2021/turkiye-wealth-fund-receives-eur-125-billion-syndicated-loan; Aykan Erdemir and Umut Can Fidan, “Turkey’s Ziraat Bank Under Scrutiny – Irregularities Point to Erdoğan’s Manipulation of Financial System to Consolidate Power,” Foundation for Defense of Democracies, February 26, 2021, https://www.fdd.org/analysis/memos/2021/02/26/turkeys-ziraat-bank-under-scrutiny; Laura Pitel, “Erdogan Takes Control of Turkey’s Sovereign Wealth Fund,” Financial Times, September 12, 2018, https://www.ft.com/content/8fe07c16-b693-11e8-bbc3-ccd7de085ffe; “Erdogan’s Son-in-Law Leaves Sovereign Wealth Fund,” Arab News, November 27, 2020, https://www.arabnews.com/node/1769276/middle-east; Veli Toprak, “Varlık Fonu’ndaki Giz! Muhalefet Tepki Gösterdi [The Secret in the Wealth Fund! The Opposition Pushes Back],” Sözcü, January 28, 2021, https://www.sozcu.com.tr/2021/ekonomi/varlik-fonundaki-giz-muhalefet-tepki-gosterdi-6232495; Daniel Dombey, “Karamehmet: No Longer the Richest,” Financial Times, February 28, 2012, https://www.ft.com/content/22a0c616-9927-3a0d-81dc-03d7a793fcae; “Guide to Major Turkish Daily Newspapers 2008,” U.S. Office of the Director of National Intelligence, Open Source Center, October 7, 2008, https://fas.org/irp/dni/osc/turkish-news.pdf; Soner Cagaptay, “Turkey’s Republic of Fear,” Wall Street Journal, March 4, 2010, https://www.wsj.com/articles/SB10001424052748704187204575101820058883004; Aykan Erdemir and Varsha Koduvayur, “Brothers in Arms: The Consolidation of the Turkey-Qatar Axis,” Foundation for Defense of Democracies, December 11, 2019, https://www.fdd.org/analysis/2019/12/11/brothers-in-arms; and Zülfikar Doğan, “Erdoğan Becomes Boss of Turkey’s Largest GSM Operator, Internet and Digital Platforms,” Ahval News, October 27, 2020, https://ahvalnews.com/turkcell/erdogan-becomes-boss-turkeys-largest-gsm-operator-internet-and-digital-platforms.”

⁶ “Sıra Sayısı: 411 Türkiye Varlık Fonu Kurulması ile Bazı Kanun ve Kanun Hükmünde Kararnamelerde Değişiklik Yapılmasına Dair Kanun Tasarısı (1/750) ve İstanbul Milletvekili Mehmet Akif Hamzaçebi’nin; 19.4.2021 Tarihli ve 6292 Sayılı Orman Köylülerinin Kalkınmalarının Desteklenmesi ve Hazine Adına Orman Sınırları Dışına Çıkarılan Yerlerin Değerlendirilmesi ile Hazineye Ait Tarım Arazilerinin Satışı Hakkında Kanunda Değişiklik Yapılması Hakkında Kanun Teklifi (2/571) ile Plan ve Bütçe Komisyonu Raporu, [Ordinal Number: 411 The Establishment of Turkey Wealth Fund With Certain Laws and Statutory Decision Changes Relevant Draft (1/750) and Istanbul Member of Parliament Mehmet Akif Hamzaçebi’s 4/19/2021-Dated and 6292-Numbered Support for Forest Villages’ Development and Law Proposal on the Evaluation of the Areas Taken Out of the Forest on Behalf of the Treasury and Amendment to the Law on the Sale of Agricultural Lands Owned by the Treasury (2/571) Plan and Budget Commission Report],” Grand National Assembly of Türkiye, accessed January 26, 2022, https://www5.tbmm.gov.tr/sirasayi/donem26/yil01/ss411.pdf.

⁷ “Sıra Sayısı: 413 Adalet ve Kalkınma Partisi Grup Başkanvekili Kayseri Milletvekili Mustafa Elitaş ve Isparta Milletvekili Süreyya Sadi Bilgiç ile 14 Milletvekilinin Türkiye Varlık Fonu Kurulması ile Katma Değer Vergisi Kanunda Değişiklik Yapılmasına Dair Kanun Teklifi (2/1319) ile Plan ve Bütçe Komisyonu Raporu, [Ordinal Number: 413 Justice and Development Party Group Deputy Chairman and Kayseri Member of Parliament Mustafa Elitaş and Isparta Member of Parliament Süreyya Sadi Bilgiç With 14 Members of Parliament and the Establishment of Turkey Sovereign Wealth Fund With the Law Related to the Value-Added Tax Proposal (2/1319) Plan and Budget Commission Report],” Grand National Assembly of Türkiye.

⁸ “Sıra Sayısı: 413 Adalet ve Kalkınma Partisi Grup Başkanvekili Kayseri Milletvekili Mustafa Elitaş ve Isparta Milletvekili Süreyya Sadi Bilgiç ile 14 Milletvekilinin Türkiye Varlık Fonu Kurulması ile Katma Değer Vergisi Kanunda Değişiklik Yapılmasına Dair Kanun Teklifi (2/1319) ile Plan ve Bütçe Komisyonu Raporu, [Ordinal Number: 413 Justice and Development Party Group Deputy Chairman and Kayseri Member of Parliament Mustafa Elitaş and Isparta Member of Parliament Süreyya Sadi Bilgiç With 14 Members of Parliament and the Establishment of Turkey Sovereign Wealth Fund With the Law Related to the Value-Added Tax Proposal (2/1319) Plan and Budget Commission Report]”; and “Türkiye Varlık Fonu Yönetimi Anonim Şirketinin Kurulması İle Bazı Kanunlarda Değişiklik Yapılmasına Dair Kanun” [The Law on the Amendment of Certain Laws with the Establishment of the Turkey Wealth Fund Management Corporation], Grand National Assembly of Türkiye.

⁹ “Kanun: Türkiye Varlık Fonu Yönetimi Anonim Şirketinin Kurulması İle Bazı Kanunlarda Değişiklik Yapılmasına Dair Kanun [Law: The Law on the Amendment of Certain Laws with the Establishment of the Turkey Wealth Fund Management Corporation],” Official Gazette.

¹⁰ Asli Kandemir and David Dolan, “Turkey Seeks to Manage $200 Bln in Sovereign Fund Soon—Minister,” Reuters, August 26, 2016, https://www.reuters.com/article/turkey-economy-swf/turkey-seeks-to-manage-200-bln-in-sovereign-fund-soon-minister-idUSI7N1A302I.

¹¹ “Turkey 2021 Energy Policy Review,” International Energy Agency, March 2021, https://www.iea.org/reports/turkey-2021.

¹² “Cumhuriyet Tarihinin Bütçe Analizi, [Budget Analysis of the Republic’s History],” Mynet, January 25, 2011, https://finans.mynet.com/haber/detay/ekonomi/cumhuriyet-tarihinin-butce-analizi/957/; and “Bütçe 2021'de 192,2 milyar TL açık Verdi,” [The budget deficit reached 192.2 billion liras in 2021], Bloomberg HT, January 17, 2022, https://www.bloomberght.com/butce-2021-de-acik-yazdi-2296726. 

¹³ “License for Games of Chance Transferred to Wealth Fund,” Daily Sabah.

¹⁴ Ercan Ersoy, “Turkey Plans Massive Transfer of Assets to State Wealth Fund.”.

¹⁵ Ant, “Erdogan Names Himself Turkey Wealth Fund Chairman in Shakeup.”.

¹⁶ Orhan Coskun, “Turkey Transfers Billions in Major Company Stakes to Sovereign Wealth Fund,” Reuters, February 6, 2017, https://www.reuters.com/article/us-turkey-economy-fund-idUSKBN15L1PG.

¹⁷ The insurance companies included Güneş Sigorta, Halk Sigorta, Ziraat Sigorta, Vakıf Emeklilik ve Hayat, Halk Hayat ve Emeklilik, and Ziraat Hayat ve Emeklilik. See Tuncay, Caglayan, and Butler, “Turkish Insurance Shares Jump After Wealth Fund Takeover.”.

¹⁸ Presidency of the Republic of Turkey, “Our Portfolio,” Turkey Wealth Fund, accessed August 2, 2023, https://www.tvf.com.tr/en/our-portfolio.

¹⁹ Can Sezer, Ebru Tuncay, and Jonathan Spicer, “CEO Sets Turkey’s Wealth Fund on Foreign Growth Path,” Reuters, October 8, 2020, https://www.reuters.com/article/turkey-fund-int/ceo-sets-turkeys-wealth-fund-on-foreign-growth-path-idUSKBN26T16Z.

²⁰ “Turkey Wealth Fund: Sovereign Wealth Fund in Turkey, Middle East,” Sovereign Wealth Fund Institute, accessed August 1, 2023, https://www.swfinstitute.org/profile/598cdaa60124e9fd2d05c184.

²¹ Yunus Girgin, “Turkey’s External Gross Debt Stock at $448.4B in Q1 of 2021,” Anadolu Agency, June 30, 2021, https://www.aa.com.tr/en/economy/turkeys-external-gross-debt-stock-at-4484b-in-q1-of-2021/2289831; Laura Pitel, “Turkey Spent at Least $7.3bn Propping Up Lira in December,” Financial Times, January 7, 2022, https://www.ft.com/content/0fb17405-4b34-445c-ac90-8522f2c2d2d3.

²² Kerim Karakaya and Ercan Ersoy, “Turkey Wealth Fund Shows Signs of Life as It Seeks Foreign Loan,” Bloomberg, October 20, 2017, https://www.bloomberg.com/news/articles/2017-10-20/turkey-wealth-fund-said-to-be-seeking-loan-from-a-foreign-bank.

²³ The consortium brought together eight banks from Asia, Europe, the Middle East, and North America. “Turkey Wealth Fund Receives EUR 1 Billion Syndication Loan,” Turkey Wealth Fund..

²⁴ The banks that received the mandate were Bank of America-Merrill Lynch, Citi Bank, HSBC, and the Industrial and Commercial Bank of China. Karakaya and Kandemir, “Turkey Wealth Fund Hires HSBC, Citi, ICBC for Debut Eurobond.”.

²⁵ Kerim Karakaya and Cagan Koc, “Turkey Wealth Fund Seeks to Refinance Loan in Test After Shakeup,” Bloomberg, March 10, 2021, https://www.bloomberg.com/news/articles/2021-03-10/turkey-wealth-fund-seeks-to-refinance-loan-in-test-after-shakeup; and “Türkiye Wealth Fund Receives EUR 1.25 Billion Syndicated Loan,” Turkey Wealth Fund.

²⁶ “Sıra Sayısı: 411 Türkiye Varlık Fonu Kurulması ile Bazı Kanun ve Kanun Hükmünde Kararnamelerde Değişiklik Yapılmasına Dair Kanun Tasarısı (1/750) ve İstanbul Milletvekili Mehmet Akif Hamzaçebi’nin; 19.4.2021 Tarihli ve 6292 Sayılı Orman Köylülerinin Kalkınmalarının Desteklenmesi ve Hazine Adına Orman Sınırları Dışına Çıkarılan Yerlerin Değerlendirilmesi ile Hazineye Ait Tarım Arazilerinin Satışı Hakkında Kanunda Değişiklik Yapılması Hakkında Kanun Teklifi (2/571) ile Plan ve Bütçe Komisyonu Raporu, [Ordinal Number: 411 The Establishment of the Turkish Wealth Fund With Certain Laws and Statutory Decision Changes Relevant Draft (1/750) and Istanbul Member of Parliament Mehmet Akif Hamzaçebi’s 4/19/2021-Dated and 6292-Numbered Support for Forest Villages’ Development and Law Proposal on the Evaluation of the Areas Taken Out of the Forest on Behalf of the Treasury and Amendment to the Law on the Sale of Agricultural Lands Owned by the Treasury (2/571) Plan and Budget Commission Report],” Grand National Assembly of Türkiye.

²⁷ Taylan Buyuksahin, “Varlık fonu borç fonuna döndü,” [The Wealth Fund Turned Into a Debt Fund], Sözcü, January 12, 2021, https://www.sozcu.com.tr/2021/ekonomi/varlik-fonu-borc-fonuna-dondu-6207375/.

²⁸ Ayla Jean Yackley, “Moody’s Cuts Turkey’s Credit Rating to ‘Junk’,” Reuters, September 24, 2016, https://www.reuters.com/article/turkey-economy-moodys/moodys-cuts-turkeys-credit-rating-to-junk-idUSL8N1C006Z.

²⁹ Peter Wells, “Moody’s Cuts Turkey’s Credit Rating Deeper Into Junk Territory,” Financial Times, June 14, 2019, https://www.ft.com/content/7199c006-8ee6-11e9-a1c1-51bf8f989972.

³⁰ “Fitch Revises Outlook on Turkey’s Wealth Fund to Negative on Sovereign Outlook Revision,” Fitch Ratings, December 13, 2021, https://www.fitchratings.com/research/international-public-finance/fitch-revises-outlook-on-turkey-wealth-fund-to-negative-on-sovereign-outlook-revision-13-12-2021; and “Ratings Definitions,” Fitch Ratings, accessed January 26, 2022, https://www.fitchratings.com/products/rating-definitions.

³¹ Kerim Karakaya and Ercan Ersoy, “Turkey Wants Telecom Giant’s Shareholder Banks to Finance Buyout,” Bloomberg, January 27, 2022, https://www.bloomberg.com/news/articles/2022-01-27/turkey-wants-telecom-giant-s-shareholder-banks-to-finance-buyout.

³² Firat Kozok, Ercan Ersoy, and Asli Kandemir, “Turkey’s Wealth Fund Seeking Majority Stake in Telecom Giant,” Bloomberg, September 30, 2021, https://www.bloomberg.com/news/articles/2021-09-30/turkish-wealth-fund-said-to-seek-majority-stake-in-telecom-giant.

³³ Turk Telekom’s previous owner Ojer Telekomunikasyon AS, controlled by the Dubai-based Oger Telekom that Saudi Telecom Co. partly owned, defaulted on a $4.75 billion loan originally provided by this consortium of banks in 2013. Ugur Yilmaz, “Turkish Banks Take Over Largest Phone Operator After Default,” Bloomberg, December 22, 2018, https://www.bloomberg.com/news/articles/2018-12-22/turkish-banks-spv-takes-over-turkey-s-largest-phone-company.

³⁴ The Turkish Treasury has a 25 percent stake and TWF has a 6.7 percent stake at the company. Lina Saigol and Selin Bucak, “Turk Telekom’s Biggest Stockholder Is Looking to Sell. Let the Intrigue Begin,” Barron’s, September 19, 2019, https://www.barrons.com/articles/turk-telekom-stake-up-for-sale-by-biggest-stockholder-let-the-intrigue-begin-51568921250.

³⁵ Karakaya and Ersoy, “Turkey Wants Telecom Giant’s Shareholder Banks to Finance Buyout.”

³⁶ Karakaya and Koc, “Turkey Set to Borrow Around $1.6 Billion for Turk Telekom Buyout”; and Ali Kucukgocmen, “Turkey’s Wealth Fund Signs Deal to Purchase 55% of Turk Telekom Shares,” Reuters, March 10, 2022, https://www.reuters.com/world/middle-east/turkeys-wealth-fund-signs-deal-purchase-55-turk-telekom-shares-2022-03-10/.

³⁷ Karakaya and Koc, “Turkey Set to Borrow Around $1.6 Billion for Turk Telekom Buyout.”

³⁸ “Turkey’s Sovereign Wealth Fund a member of Int’l Forum of SWFs,” Daily Sabah, May 17, 2017, https://www.dailysabah.com/economy/2017/05/17/turkeys-sovereign-wealth-fund-a-member-of-intl-forum-of-swfs.

³⁹ “Linaburg-Maduell Transparency Index (LMTI),” Sovereign Wealth Fund Institute, accessed July 11, 2023, https://www.swfinstitute.org/research/linaburg-maduell-transparency-index.

⁴⁰ Asli Kandemir and Ercan Ersoy, “Bankers Wanted for Turkey’s Planned $200 Billion Wealth Fund,” Bloomberg, February 7, 2017, https://www.bloomberg.com/news/articles/2017-02-07/bankers-wanted-to-run-turkey-s-planned-200-billion-wealth-fund.

⁴¹ Daniel Dombey, “Erdogan’s Right-Hand Conspiracy Theorist: Why His Appointment Matters,” Financial Times, July 9, 2013, https://www.ft.com/content/4087026e-ec93-33d0-b080-501a654af11e.

⁴² Fiachra Gibbons, “Erdoğan’s Chief Adviser Who Knows What’s Behind Turkey’s Protests—Telekinesis,” Guardian, July 13, 2013, https://www.theguardian.com/commentisfree/2013/jul/13/erdogan-turkey-protests-telekinesis-conspiracy-theories.

⁴³ Ant, “Erdogan Names Himself Turkey Wealth Fund Chairman in Shakeup.”

⁴⁴ Pitel, “Erdogan Takes Control of Turkey’s Sovereign Wealth Fund.”.

⁴⁵ “Yorum: Albayrak, Doktora, Ahlak [Commentary: Albayrak, PhD, Morality],” Deutsche Welle, December 6, 2020, https://www.dw.com/tr/yorum-albayrak-doktora-ahlak/a-55838495.

⁴⁶ Pitel, “Erdogan Takes Control of Turkey’s Sovereign Wealth Fund.”

⁴⁷ Coskun, “Turkey Transfers Billions in Major Company Stakes to Sovereign Wealth Fund.”

⁴⁸ “Erdogan’s Son-in-Law Leaves Sovereign Wealth Fund,” Arab News.

⁴⁹ Toprak, “Varlık Fonu’ndaki Giz! Muhalefet Tepki Gösterdi [The Secret in the Wealth Fund! The Opposition Pushes Back].”

⁵⁰ Turkey’s opposition parties raised vocal concerns about the accountability deficit of TWF back in 2016 during the deliberations of the draft bill to establish the fund—a prognosis that turned out to be accurate. “Sıra Sayısı: 413 Adalet ve Kalkınma Partisi Grup Başkanvekili Kayseri Milletvekili Mustafa Elitaş ve Isparta Milletvekili Süreyya Sadi Bilgiç ile 14 Milletvekilinin Türkiye Varlık Fonu Kurulması ile Katma Değer Vergisi Kanunda Değişiklik Yapılmasına Dair Kanun Teklifi (2/1319) ile Plan ve Bütçe Komisyonu Raporu [Ordinal Number: 413 Justice and Development Party Group Deputy Chairman and Kayseri Member of Parliament Mustafa Elitaş and Isparta Member of Parliament Süreyya Sadi Bilgiç With 14 Members of Parliament and the Establishment of Turkey Sovereign Wealth Fund With the Law Related to the Value-Added Tax Proposal (2/1319) Plan and Budget Commission Report],” Grand National Assembly of Türkiye.

⁵¹ Kerim Karakaya, Onur Ant, and Benjamin Harvey, “Turkey’s $200 Billion Wealth Fund Paralyzed by Internal Strife,” Bloomberg, September 6, 2017, https://www.bloomberg.com/news/articles/2017-09-07/turkey-s-200-billion-wealth-fund-paralyzed-by-internal-strife.

⁵² İsmail Engin, “Türkiye Varlık Fonunun Riskleri [The Risks of Turkey Wealth Fund],” Ankara Hacı Bayram Veli Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi 24, no. 1 (2020): 141–170, https://dergipark.org.tr/en/download/article-file/2091495.

⁵³ Erdemir and Can Fidan, “Turkey’s Ziraat Bank Under Scrutiny.” .

⁵⁴ “Mikhail Fridman (Co-founder, LetterOne),” LetterOne, archived February 26, 2021, at the Wayback Machine, http://web.archive.org/web/20210226205259/https://www.letterone.com/about-us/our-governance/board-members/mikhail-fridman.

⁵⁵ Dombey, “Karamehmet: No Longer the Richest”; “Guide to Major Turkish Daily Newspapers 2008,” U.S. Office of the Director of National Intelligence; and Cagaptay, “Turkey’s Republic of Fear.”

⁵⁶ “Turkey Wealth Fund Agrees to Acquire Control of Turkcell,” PR Newswire, June 17, 2020, https://www.prnewswire.com/news-releases/turkey-wealth-fund-agrees-to-acquire-control-of-turkcell-301079158.html; and “Telia Co AB,” Bloomberg, accessed January 26, 2021, https://www.bloomberg.com/profile/company/TLSNF:US.

⁵⁷ Asli Kandemir, Ercan Ersoy, and Kerim Karakaya, “Sweden’s Telia in Talks With Turkish Sovereign Wealth Fund for Turkcell Stake,” Bloomberg, June 16, 2020, https://www.bloomberg.com/news/articles/2020-06-16/telia-said-in-talks-to-sell-turkcell-stake-to-turkey-wealth-fund; “Telia Company Agrees to Divest Its Interest in Turkcell Holding,” Telia Company, June 17, 2020, https://www.teliacompany.com/en/news/press-releases/2020/6/telia-company-agrees-to-divest-its-interest-in-turkcell-holding; “White Paper on Turkcell,” Telia Company, March 19, 2019, previously accessible at https://www.teliacompany.com/globalassets/telia-company/documents/investors/white-papers/turkcell_white_paper_20190319.pdf; and “Turkey Fund Says to Assume Cukurova Debt to Ziraat Bank,” Reuters, June 18, 2020, https://www.reuters.com/article/turkcell-telia-wealth-fund-cukurova/turkey-fund-says-to-assume-cukurova-debt-to-ziraat-bank-idUSI7N2CT01V.

⁵⁸ Kandemir, Ersoy, and Karakaya, “Sweden’s Telia in Talks with Turkish Sovereign Wealth Fund for Turkcell Stake”; and Daren Butler and Helena Soderpalm, “UPDATE 2-Telia Exits Turkish Markets With $530 Mln Sale of Turkcell Stake,” Reuters, June 17, 2020, https://www.reuters.com/article/turkcell-telia-wealth-fund/update-2-telia-exits-turkish-markets-with-530-mln-sale-of-turkcell-stake-idINL8N2DU6UN.

⁵⁹ “Cukurova Holding AS,” Bloomberg, accessed January 26, 2021, https://www.bloomberg.com/profile/company/1047Z:TI.

⁶⁰ Dombey, “Karamehmet”; “Guide to Major Turkish Daily Newspapers 2008,” U.S. Office of the Director of National Intelligence; and Cagaptay, “Turkey’s Republic of Fear.”

⁶¹ Marc Champion, “Turkey’s Richest Man Fights to Survive,” Wall Street Journal, November 22, 2011, https://www.wsj.com/articles/SB10001424052970203710704577051973722340202; Delphine Strauss, “Çukurova Owner Faces 11-Year Jail Term,” Financial Times, February 11, 2010, https://www.ft.com/content/c54563ba-1748-11df-94f6-00144feab49a; and Nate Schenkkan, “Muzzling the Press: Turkey’s Long War Against the Media,” World Politics Review, January 5, 2016, https://www.worldpoliticsreview.com/articles/17593/muzzling-the-press-turkey-s-long-war-against-the-media.

⁶² “2015 Billionaires Net Worth,” Forbes, March 2, 2015, https://www.forbes.com/profile/mehmet-emin-karamehmet.

⁶³ Doğan, “Erdoğan Becomes Boss of Turkey’s Largest GSM Operator, Internet and Digital Platforms.”.

⁶⁴ “Turkey Fund Says to Assume Cukurova Debt to Ziraat Bank,” Reuters, June 18, 2020, https://www.reuters.com/article/turkcell-telia-wealth-fund-cukurova/turkey-fund-says-to-assume-cukurova-debt-to-ziraat-bank-idUSI7N2CT01V.

⁶⁵ Mustafa Sonmez, “Is Turkey’s Wealth Fund Becoming a Crisis Shelter,” Al-Monitor, June 22, 2020, https://www.al-monitor.com/pulse/originals/2020/06/turkey-wealth-fund-becoming-crisis-shelter-covid19-turkcell.html.

⁶⁶ Mustafa Sonmez, “Turkey’s ‘Wealthless’ Wealth Fund a Tangle of Problems,” Al-Monitor, January 13, 2021, https://www.al-monitor.com/pulse/originals/2021/01/turkey-economy-wealthless-wealth-fund-a-tangle-of-problems.html; Firat Kozok and Tugce Ozsoy, “Qatar Inks Deal for Minority Stake in Turkish Stock Exchange,” Bloomberg, November 26, 2020, https://www.bloomberg.com/news/articles/2020-11-26/turkey-signs-deal-to-sell-borsa-istanbul-minority-stake-to-qatar; “Turkey Sells 10% of Borsa Istanbul Shares to Qatar,” Reuters, November 30, 2020, https://www.reuters.com/article/turkey-qatar-bourse-int/turkey-sells-10-of-borsa-istanbul-shares-to-qatar-idUSKBN28A2N2; and Andrew Wilks, “Erdogan Accused of Selling Out Turkey’s Most Prized Assets to Qatar,” National, November 30, 2020, https://www.thenationalnews.com/world/erdogan-accused-of-selling-out-turkey-s-most-prized-assets-to-qatar-1.1120691.

⁶⁷ Erdemir and Koduvayur, “Brothers in Arms: The Consolidation of the Turkey-Qatar Axis.”.

⁶⁸ “Turkish Wealth Fund to Inject 21 Bln Lira Capital to State Banks,” Reuters, May 11, 2020, https://www.reuters.com/article/turkey-banks-capital/turkish-wealth-fund-to-inject-21-bln-lira-capital-to-state-banks-idUKL8N2CT71X.

⁶⁹ “Core Capitals of State-Owned Banks Will Be Increased With a Total of TL 21 Billion,” TürkiyeWealth Fund, May 11, 2020, https://www.tvf.com.tr/en/contact/disclosures/2020/core-capitals-of-state-owned-banks-will-be-increased-with-a-total-of-tl-21-billion.

⁷⁰ Note that Cukurova Finance is a related but not identical entity to Çukurova Holding. Füsun S. Nebil, “Turkcell Hisseleri TVF’na Değil Haziran’da Kurulan Şirkete Aktarılıyor [Turkcell Shares Are Transferred to a Company Founded in June, Not to TWF],” Turk-Internet, September 26, 2020, https://turk-internet.com/turkcell-hisseleri-tvfna-degil-haziranda-kurulan-sirkete-aktariliyor.

⁷¹ “Framework Agreement,” U.S. Securities and Exchange Commission, June 17, 2020, https://www.sec.gov/Archives/edgar/data/1071321/000119312520172597/d945041dex99d.htm; “Özel Durum Açıklaması (Genel) [A Statement About a Special Case (General)],” Republic of Turkey Central Securities Depository, Public Disclosure Platform, September 11, 2020, https://www.kap.org.tr/tr/Bildirim/874621; “Turkcell Iletisim Hizmetleri AS [Turkcell Communications Services],” Bloomberg, accessed August 2, 2023, https://www.bloomberg.com/quote/TKC:US.

⁷² “Turkcell for the Future: Corporate Governance Q&A,” Turkcell, archived December 17, 2021, at the Wayback Machine, http://web.archive.org/web/20211217163659/http://turkcellforthefuture.com/document/Corporate_Governance_Q&A.pdf.

⁷³ David Hellier, “Billionaire Mikhail Fridman Seeks Boardroom Clearout at Turkcell,” Bloomberg, January 4, 2022, https://www.bloomberg.com/news/articles/2022-01-04/billionaire-mikhail-fridman-seeks-boardroom-clearout-at-turkcell.

⁷⁴ Hellier, “Billionaire Mikhail Fridman Seeks Boardroom Clearout at Turkcell.”

⁷⁵ Hellier, “Billionaire Mikhail Fridman Seeks Boardroom Clearout at Turkcell.”

⁷⁶ Erdal Saglam, “Varlık Fonu Mu Darlık Fonu Mu? [Is it a Wealth Fund or a Poverty Fund?],” Hürriyet, February 7, 2017, https://www.hurriyet.com.tr/yazarlar/erdal-saglam/varlik-fonu-mu-darlik-fonu-mu-40357684.

⁷⁷ The Connection Between Russian Sanctions and Bizarre Turkish Monetary Policy,” Economist, August 25, 2022, https://www.economist.com/finance-and-economics/2022/08/25/the-connection-between-russian-sanctions-and-bizarre-turkish-monetary-policy.

⁷⁸ Carlotta Gall, “Many Turks Can’t Afford Bread, and Bakers Can’t Afford to Make It,” New York Times, December 15, 2021, https://www.nytimes.com/2021/12/15/world/europe/turkey-bread-prices.html.

⁷⁹ Chris Giles, “Why Erdogan’s Unorthodox Turkish Economic Experiment Is Not Working,” FinancialTimes, December 21, 2021, https://www.ft.com/content/4a7303dc-9bf6-4a70-8078-13f98edc30b4.

⁸⁰ Transparency International, “Corruption Perceptions Index,” accessed August 2, 2023, https://www.transparency.org/en/cpi/2022.

⁸¹ Aykan Erdemir and John A. Lechner, “Why Erdogan Won’t Ask the IMF for Help,” Foreign Policy, June 1, 2020, https://foreignpolicy.com/2020/06/01/why-erdogan-wont-ask-the-imf-for-help/; Ercan Ersoy and Asli Kandemir, “JPMorgan Calls Turnaround on Turkey as More Borrowers Return,” Bloomberg, October 20, 2020, https://www.bloomberg.com/news/articles/2020-10-20/jpmorgan-calls-turnaround-on-turkey-as-markets-warm-to-borrowers; and Mustafa Sonmez, “Cash-Strapped Turkey Relies on Qatari Investments,” Al-Monitor, December 2, 2020, https://www.al-monitor.com/originals/2020/12/turkey-gulf-qatar-became-second-biggest-foreign-investor.html.

⁸² Charlie Robertson, Twitter post, October 21, 2021, 4:48 a.m., https://twitter.com/RencapMan/status/1451153455704428550.

⁸³ Karin Strohecker, “‘Embarrassing’ Potential Ouster From MSCI Index Could Bruise Turkish Markets,” Reuters, June 25, 2020, https://www.reuters.com/article/us-turkey-stocks-index-analysis/embarrassing-potential-ouster-from-msci-index-could-bruise-turkish-markets-idUSKBN23W1XG.

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.¹ The significant funds involved in major projects may present a tempting target for corrupt officials and private sector fraudsters alike. Complicated and opaque contractual arrangements, a lack of transparency and accountability mechanisms for public funds, and the need to maintain political patronage networks can all contribute to creating the ideal conditions for bribery and embezzlement.

The consequences are especially serious for developing countries, most of which can ill afford the 20–30 percent of project value often estimated to be lost through corruption.² The International Monetary Fund’s analysis suggests that low-income developing countries in particular lose, on average, 53 percent of project resources to inefficiencies, including corruption.³

These heightened corruption risks have been widely understood for decades. It is for this reason that major international lenders frequently attach conditions related to good governance when providing loans or grants for infrastructure projects. In fact, the importance of infrastructure development and the vast sums of money involved often provide external donors or investors with considerable influence over decisions made by recipient governments. This has led many to criticize international lenders for imposing measures that are too constrictive, impinging on recipient countries’ sovereignty; some critics have gone as far as to level accusations of neocolonialism.⁴

In 2013, China’s newly ascended President Xi Jinping announced a global infrastructure plan that promised to upend the entire sector. China’s Belt and Road Initiative (BRI) has not only supercharged infrastructure investment worldwide but has brought these long-standing questions about corruption and political influence to the fore.

To bankroll the BRI’s launch and expansion, Xi turned to the rising might of China’s sovereign wealth funds (SWFs), policy banks, and other state-owned financial institutions. This chapter provides a brief overview of these entities’ role in funding BRI projects worldwide and examines whether this behavior has exacerbated vulnerabilities to corruption and Chinese political pressure in recipient countries.

The Belt and Road Initiative

The BRI is China’s flagship overseas infrastructure investment program and an amalgamation of the Silk Road Economic Belt scheme and the 21st Century Maritime Silk Road scheme. The BRI was known initially as One Belt One Road, but after a period of policy shuffling, it emerged in its current form in 2015.

The BRI is not an entirely new concept for China but rather a reorganization and expansion of existing initiatives that grew out of China’s Going Out policy that had encouraged Chinese companies to invest overseas since 1999. Many existing overseas development projects were simply repackaged under the BRI umbrella.

China’s Objectives

In 2013, Xi identified “five connectivities” that embodied his aspirations for what the BRI would become: “We hope to achieve policy, infrastructure, trade, financial, and people-to-people connectivity and thus build a new platform for international co-operation to create new drivers of shared development.”⁵ To date, however, the BRI’s expansion has been spearheaded almost exclusively by infrastructure deals.

While Xi and senior Chinese Communist Party (CCP) leaders set the overall policy goals for the BRI, these were broadly framed from the outset and delegated to a wide range of state entities with very different, and sometimes conflicting or competing, priorities. But generally, the BRI aims to advance Chinese priorities regarding economic growth, national security, and global influence.⁶

There were compelling domestic reasons for embarking upon what was touted at the time as a Chinese Marshall Plan. The government policies that propelled China’s extraordinary economic growth had also created severe overcapacity in some sectors. Access to new trade routes and export markets was sought to ease the pressure valve that constrained China’s economy, alleviating the prospect of economic meltdown and political instability. Beijing also hoped that propelling the BRI overland through China into Central Asia would spark development in the country’s poorer western regions, including the increasingly restive Xinjiang.⁷

Sustaining economic growth may have been China’s primary impetus for launching the BRI, but political and security concerns also featured prominently in early policy planning. Beijing believed a major infrastructure investment program that could replicate China’s own poverty alleviation efforts around the world—providing an alternative development model from the prevailing dependence on Western concessional lenders—would be a prestigious achievement befitting a rising power.

Chinese officials were also concerned with countering the United States’ 2010 “pivot to Asia.” Beijing sought to intensify periphery diplomacy to engage neighboring countries, as well as to create economic ties that would bring them politically closer to China and expand its regional hegemony.⁸

China’s security considerations also included protecting and diversifying its critical supply routes. Developing the China-Pakistan economic corridor and opening Gwadar Port to Chinese shipping, for example, was meant to resolve the “Malacca Dilemma,” whereby almost 80 percent of China’s oil imports and 40 percent of its total trade in goods pass through a narrow shipping channel that is highly vulnerable to naval blockade.⁹

Given these political and security considerations—and China’s aggressive push for global influence—many observers have questioned whether Beijing’s underlying plan was to deliberately entrap recipient countries by entangling their leaders in corruption scandals and saddling them with unsustainable debt; this would render them vulnerable to Chinese political pressure or even force them to surrender strategically valuable land. The evidence for and against this idea of “debt-trap diplomacy” is considered in detail below.

Composition and Structure

Officially, the BRI consists of six overland economic corridors that cross through Central Asia and additional sea trade routes extending through the Indo-Pacific. Yet there is no formal national membership process or structure, with participation most often signified through non–legally binding memorandums of understanding (MOUs) or other less formal cooperation agreements between China and the recipient government. The number of BRI participants was just thirty-one in the period 2013–2016 but exploded to 120 in 2017–2019 and has grown again to 140 since 2019.¹⁰ The BRI is also no longer geographically confined to its six stated economic corridors, with participants popping up in the Caribbean and Latin America.

Neither is there any official list of all BRI projects. There are no consistent standards, certification schemes, or even branding efforts that signify whether individual Chinese-backed overseas infrastructure projects are formally part of the BRI or not (unless they are explicitly mentioned in MOUs).

Unsurprisingly, efforts to understand what the BRI actually is, let alone to monitor its expansion and measure its impact, have often proven difficult for external observers. This includes estimates of how much China has actually spent, or committed to spending, on BRI projects worldwide. As of mid-2023, the American Enterprise Institute put total investment and construction costs at roughly $965 billion.¹¹ The Center for Global Development, meanwhile, counted total announced investments at $8 trillion in 2018.¹² These are both sound attempts to measure unreliable information that resulted in staggeringly different figures.

The BRI is best understood as an organizing concept and guiding plan for China’s overseas infrastructure investment. The absence of clear objectives and an institutional framework creates inherent risks regarding oversight and accountability. This applies particularly to how BRI expansion has been financed.

How the BRI Is Financed

China’s rapid ascent to become the world’s second-largest economy and leading trading partner had placed it in possession of some $1.5 trillion in foreign currency reserves in 2007, a figure unprecedented in global history but one that would continue surging to nearly $4 trillion in 2014.¹³ Instead of continuing to pile these funds into the low-yielding, default investment instrument—U.S. Treasury bonds—Xi sought to put China’s foreign exchange holdings to work in advancing his many domestic and overseas policy priorities. This included launching and expanding the BRI.

The institutional infrastructure around BRI lending is complex, fragmented, and not particularly transparent.¹⁴ As noted in figure 1,¹⁵ at the apex sits the State Council, which approves major decisions, with the Ministry of Finance and the recently created Chinese International Development Cooperation Agency also directly involved in oversight and approvals. The Ministries of Commerce and Foreign Affairs coordinate the overseas activities of Chinese companies working under the BRI.

The vast majority of BRI loans are negotiated and provided by China’s state-owned policy banks and, increasingly, its state-owned commercial banks. These institutions are accountable to the political bodies listed above, but they appear to have relative autonomy in the day-to-day business of BRI lending. Created to help drive China’s economic liberalization reforms, Chinese policy and commercial banks have played a critical role in shaping the country’s financial sector and emergence as a global economic power.

The People’s Bank of China, China’s central bank, dominated the country’s financial sector until the 1990s, when what are now known as the “big five” state-owned banks were commercialized and began lending on a more competitive basis: the Industrial and Commercial Bank of China, China Construction Bank, Bank of China, Bank of Communications, and Agricultural Bank of China.

China’s policy banks—the Agricultural Development Bank of China, China Development Bank (CDB), and the Export-Import Bank of China (Exim Bank)—were established in 1994 with a different mandate. The policy banks exist explicitly to implement the government’s economic and financial agenda.

Of these institutions, by far the most important for BRI purposes are CDB and the Exim Bank. According to a recent report on BRI financing by AidData, these two policy banks provided around three-quarters of all BRI loans as of 2017.¹⁶ However, the commercial banks have assumed an increasingly prominent role throughout the BRI’s lifespan, with lending activities increasing fivefold during the BRI’s first five years.¹⁷

Two trends are important to note. First, there has been a shift toward more commercially oriented lending during the BRI’s lifespan, reflecting growing concerns in Beijing about rising debt levels and the long-term viability of the initiative.¹⁸ Second, there has been a sharp decline in new BRI loans since 2017. Lending from CDB and the Exim Bank dropped from a peak of $75 billion in 2016 to just $4 billion in 2019.¹⁹ This does not suggest that the BRI will end anytime soon, but rather that Beijing is rethinking its approach in light of various challenges discussed in the sections below. Gone is the era of easy money for ambitious infrastructure megaprojects; the BRI label is now increasingly being applied to less expensive initiatives in academia, green energy, telecommunications, and other sectors more aligned with the other four BRI “connectivities” originally outlined by Xi.²⁰

The Role of China’s Sovereign Wealth Funds

As figure 2 demonstrates, China’s policy banks and state-owned commercial banks are the front-end lenders in BRI financing. But it is the SWFs responsible for managing foreign exchange reserves that, through the state-owned banks, have ultimately provided much of the financing for the BRI.²¹ The funds rarely appear by name in external studies of BRI project financing, however, because for the most part, they have not tended to make direct investments in BRI projects.

CDB’s major shareholders are the Ministry of Finance, Central Huijin Investment, and Buttonwood Investment Holding. The Exim Bank is wholly owned by the Chinese government and subordinate to the State Council. Central Huijin and Buttonwood are companies that serve as investment vehicles for two Chinese SWFs: the China Investment Corporation (CIC) and the State Administration of Foreign Exchange (SAFE) respectively.

These are the means through which the policy banks are capitalized with foreign exchange reserves. Notably, Buttonwood was established by SAFE specifically to finance the creation of the Silk Road Fund, a Chinese SWF intended exclusively to support BRI expansion (though it currently accounts for just a fraction of total investments). But through Buttonwood, SAFE also provided CDB and the Exim Bank with major injections of $48 billion and $45 billion respectively in 2015.²²

State Administration of Foreign Exchange

SAFE is a vice-ministry that has also been a subsidiary department of the People’s Bank of China since 1998. As the name suggests, its primary duty is managing and investing China’s foreign exchange reserves.

Relatively little is known about SAFE’s corporate governance beyond its basic organizational structure and senior personnel. Nor does it publicly disclose information about the nature of its investments. These are managed through corporate subsidiaries, including the SAFE Investment Company, based in Hong Kong (the existence of which SAFE did not admit until 2008), and more recently, the Buttonwood investment platform.²³ As the scholar William Norris suggests, “such a predilection for secrecy, a lack of public accountability, and an absence of transparency make SAFE well-suited to be used to pursue noncommercial activities.”²⁴

China Investment Corporation

CIC is China’s only officially acknowledged SWF. It was launched in 2007 with $200 billion in initial funding and a mission to diversify China's foreign exchange holdings and seek maximum returns.²⁵ CIC is a company under Chinese law and operates in a more transparent manner than SAFE. It oversees both domestic investments and a vast overseas portfolio, with reported total assets of around $1.2 trillion as of the end of 2020.²⁶ It is the second-largest SWF globally after the Government Pension Fund of Norway, though it is fast closing on the latter for the top spot.

CIC was created by the Chinese government partly as a response to criticisms that SAFE had made imprudent overseas investments and was not an efficient guardian of China’s foreign exchange holdings. CIC therefore competes with SAFE within the framework of China’s financial bureaucracy, having assumed control of some of the latter’s historical responsibilities.

CIC began operations just months before the onset of the 2007–2008 global financial crisis and initially sustained heavy losses from having taken major direct stakes in U.S. financial institutions such as Blackstone and Morgan Stanley.²⁷ These losses, and the criticism leveled at CIC by Chinese officials and the public, reportedly brought CIC under stricter control and prompted it to refocus on other sectors, including energy and natural resources.²⁸

Whereas SAFE has always conducted itself in the manner of a policy bank, CIC is generally considered to have operated, initially at least, primarily in line with its commercial mission and largely in compliance with international standards pertaining to corporate governance.²⁹ In 2008, for example, CIC joined the International Forum of SWFs, and its officials were actively involved in drawing up the Santiago Principles.

After Xi’s accession and the launch of the BRI, however, CIC’s focus changed, adopting more of a policy orientation to support its expansion. The fund has invested directly, and through consortiums, in several major overseas deals in the infrastructure and real estate sectors, including under the BRI.³⁰ In 2015, for example, CIC acquired a controlling stake in the Kumport Terminal, Türkiye’s third-largest container port.³¹ Just one year later, it participated in a consortium to purchase a fifty-year lease on the Port of Melbourne, Australia’s main cargo and container port.³²

CIC’s sudden interest in commercial assets that also possessed potential strategic value began to attract scrutiny from Western governments. As Zongyuan Zoe Liu has observed, this forced CIC to become “innovative in structuring deals in such a way as to pass scrutiny and receive approval that otherwise would be nearly impossible to obtain.”³³

In early 2023, for example, a new register of real estate ownership by foreign entities in the United Kingdom (which is not part of the BRI) revealed that CIC had used offshore shell companies to acquire more than 250 properties, including critical regional infrastructure and food supply chain facilities.³⁴

In late 2019, CIC’s executive vice president Zhao Haiying estimated total CIC investments in BRI countries to be worth approximately $28.1 billion.³⁵ However, the truth is that CIC’s complicated investment structures make it impossible to understand the full nature and extent of its involvement.

What is clear, however, is that—as Stephen Thomas and Ji Chen conclude—SAFE and CIC “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 President Xi’s BRI projects and to help oversee the use of the funds. These new roles . . . have required more of a policy orientation for China’s SWFs . . . [as well as] significant changes in personnel, business practices, and investment goals.”³⁶

BRI Corruption Risks

Despite Beijing’s lofty intentions for the BRI, it has been plagued from the outset by opaque deals and corruption scandals. This is partly because China’s state-owned financial institutions have consistently engaged in lending practices that are indiscriminate, opaque, and unaccountable. Xi himself has acknowledged the scale of the problem, telling a 2019 summit of participant countries that “everything should be done in a transparent way and we should have zero tolerance for corruption.”³⁷

Before examining how China’s state lenders may have influenced corruption and political risks associated with the BRI, it is helpful (and indeed, only fair) to look briefly at these issues within China itself. After all, China is a partner in every BRI deal.

Despite China’s meteoric economic growth, corruption remains a serious and widespread problem. This apparent paradox arises because while many other developing countries have continued to struggle with petty and acquisitive forms of corruption, China has generally cracked down on these growth-inhibiting forms of graft.³⁸

Instead, Chinese corruption is characterized by the prevalence of what the academic Yuen Yuen Ang calls “access money”: bribes that enable entrepreneurs not only to secure a permit or other one-off bureaucratic favor but to also build relationships with influential officials capable of repeatedly creating new business opportunities (and who themselves are given strong incentives to foster economic growth by China’s central government).

While uniquely capable of spurring short-term growth, particularly in investment-heavy sectors such as housing and infrastructure, “access money” is ultimately not beneficial because it creates perverse incentives and encourages risk-taking with consequences that quickly become apparent during periods of economic difficulty. Ang does not directly address the BRI, but it is helpful to bear these issues in mind when thinking about the development model China has sought to promote through it and how China’s state-owned lenders and companies have conducted themselves during BRI projects.

Like other major Chinese financial institutions, the SWFs and the policy and commercial banks involved in BRI financing have found themselves in the crosshairs of Xi’s sweeping anti-corruption campaign. Launched in 2013, the initiative aims to reduce corruption, strengthen party “discipline,” and consolidate Xi’s powerbase. It has reportedly investigated and punished more than 4 million cadres and nearly 500 senior officials to date.³⁹

A 2016 probe by the CCP’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 tunnelling of interests” and that problems of discipline “occurred frequently.”⁴⁰

Both CIC and SAFE were reexamined by the commission in early 2022 as part of a broader crackdown on financial sector excess.⁴¹ However, these pronouncements should be treated cautiously given the politicized nature of the anti-corruption campaign. It is entirely possible that those targeted were perceived to have demonstrated ideological disloyalty to Xi or the CCP, or had simply engaged in corporate expenditure or other conduct that was not illegal but deemed to be excessive by image-conscious party bosses.

Profligate Lending

China’s policy banks are the vehicle through which Beijing has unleashed hundreds of billions of dollars into some of the most corrupt countries on Earth. Of course, many of these countries are also among the world’s poorest and consequently have the greatest need for infrastructure investment on the scale promised by the BRI. In 2019, the World Bank estimated that trade in BRI corridor economies was 30 percent below potential and foreign direct investment was 70 percent below potential. BRI transport projects alone, if properly implemented, could help to lift 7.6 million people from extreme poverty and 32 million people from moderate poverty.⁴²

But there are good reasons why many BRI countries are not attractive prospects for international donors and investors, especially in risk-prone sectors like infrastructure.

Brookings Institution research indicates that BRI participant countries are overwhelmingly “less democratic, politically stable, and economically developed” than nonparticipants.⁴³ 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 90 percent of BRI-era official lending went to countries that scored beneath the median of the World Bank’s Control of Corruption index.⁴⁴

And this is problematic because, in an extension of China’s stated policy of noninterference in other countries’ internal affairs, the country generally provides BRI loans with few or no preconditions pertaining to transparency, rule of law, or other factors that shape the wider investment climate. By way of illustration, Xi outlined China’s “five nos” in its policy toward Africa in a 2018 speech: “No interference in the way African countries pursue their development paths according to their national conditions; no interference in a country's internal affairs; no imposition of China’s will on African countries; no attachment of political strings to assistance to Africa; and no seeking of selfish political gains in investment and financing cooperation.”⁴⁵

The promise of abundant easy money made the BRI an irresistible alternative to Western development financing for many governments, who had long bristled at what they saw as burdensome conditions that interfered with their sovereignty (or perhaps threatened their kleptocracy). In some cases, the prospect of BRI money provided a popularity boost to autocrats who otherwise struggled to maintain legitimacy.⁴⁶

Beyond a general affinity for democracy and human rights, there is a practical reason Western concessional lenders routinely insist on governance preconditions: they make infrastructure projects less likely to fail. AidData found that 35 percent of BRI projects had run into major implementation problems of some kind, such as corruption scandals, labor violations, environmental hazards, or public protests.⁴⁷ Interestingly, China’s non-BRI infrastructure project portfolio encountered far fewer such problems, suggesting that this propensity for trouble is baked into the BRI itself.

In the longer term, this kind of indiscriminate lending poses a problem for China as much as for recipient countries. Despite concerns about debt diplomacy, sovereign lending is a legally undeveloped area that lacks effective enforcement mechanisms. Beijing has taken on extraordinary levels of financial risk by exporting its state-led, debt-fueled development model to governments with track records of mismanagement and default and then relying on those governments to uphold implicit liability guarantees for private sector borrowers. As noted above, recognition of these risks in Beijing is partly why BRI lending has slowed significantly in recent years. But the scale of debt associated with the BRI will continue to present significant risks for the global financial system and economy for the foreseeable future.

Opaque Negotiations

The corruption risks surrounding BRI projects have also been exacerbated by deliberate lack of transparency on the part of China’s state-owned lenders. Typically, BRI financing is arranged through bilateral agreements between the Chinese state banks and recipient governments. A Peterson Institute study of 100 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.⁴⁸

The Maldives’ Sinamalé Bridge and related BRI projects illustrate how secretive terms can catch initially supportive populations unawares. Upon meeting with the Chinese ambassador in 2018, incoming President Ibrahim Mohamed Solih discovered that his country’s BRI debt was not $1.5 billion as he feared, but rather $3 billion—more than twice the government’s annual revenue at the time.⁴⁹

It is often unclear not only how much is being lent, but to whom. AidData director Brad Parks has observed that the BRI is actually “a story about the rise of hidden debt and the fall of sovereign debt.”⁵⁰ AidData estimated that, as of 2021, BRI countries collectively owed some $385 billion to China that was not being reported to international financial institutions in the normal way, warping key statistics about the global financial system. 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.

Lack of Accountability

Finally, the backing of China’s state-owned banks means that corrupt local elites and Chinese companies engaged in BRI projects face little or no accountability for wrongdoing.

China introduced a foreign bribery law in 2011 but, despite the immense exposure of its companies overseas, has never initiated any enforcement proceedings.⁵¹ Coupled with China’s repressive media and civil society environment, this means that Chinese companies engaged in BRI projects are not subject to policing and public scrutiny in the same way that, for example, U.S. companies are supposed to be under the Foreign Corrupt Practices Act. This in turn makes Chinese lenders and contractors more attractive partners for corrupt local elites—not only because they can freely distribute bribes, but also because there is less chance of being implicated in legal trouble later on.

This pattern has not gone unnoticed, and several major Chinese contractors involved in BRI projects have been debarred by the World Bank for alleged financial malpractice and “misconduct during the procurement process.”⁵² Such high-profile censure might prove reputationally and financially fatal for many Western competitors. But many Chinese firms can ignore such concerns because they are ultimately backed not by commercially minded investors but by China’s state-owned banks.

Debt-Trap Diplomacy

China ostensibly maintains a policy of noninterference in other countries’ internal affairs. But as the corruption scandals and debt levels piled up, many observers began to question whether China was using the BRI as a vehicle for “debt-trap diplomacy”—both in order to exert political pressure on recipient countries and to acquire land and other strategically valuable assets in cases of default.

There is evidence to support the debt-trap theory, but it derives from a small number of cases that are regularly cited as reflecting wider systemic issues.

Sri Lanka’s Hambantota port in particular has become the poster child for BRI misadventures. According to a New York Times investigation, Sri Lankan officials claimed that their Chinese counterparts discussed the intelligence and strategic possibilities of the port’s location throughout loan negotiations. When Sri Lanka sought to renegotiate the repayment timeline and obtain more financing, Chinese officials refused to ease the terms and insisted instead on the transfer of equity in the port, leading to its effective surrender in the form of a ninety-nine-year lease.⁵³ It is impossible to know how many BRI contracts include such terms because they are kept secret. To date, however, this kind of predatory enforcement by China has in fact occurred relatively rarely.

The preponderance of expert opinion has therefore shifted against the idea that the BRI’s underlying grand strategy was always one of deliberate entrapment. Analysis by Chatham House—not only of the Sri Lanka case but of China’s role in Malaysia’s 1MDB scandal (see Chapter 3), where then Malaysian prime minister Najib Razak solicited help from Chinese BRI firms and officials to cover up the alleged theft of around $4.5 billion from the country’s sovereign development fund—illustrates how it is often local elites that negotiate unfavorable terms and instigate corruption schemes in order to service their domestic agendas.⁵⁴ The authors also suggest that China’s state-owned financial institutions are simply too fragmented, poorly coordinated, and prone to in-fighting to coherently advance China’s geopolitical aims.

Informed opinion within BRI recipient countries also provides a more nuanced picture than prevailing Western representations of the BRI. A recent survey of policymakers, academics, and business and media leaders in BRI recipient countries found that 41.6 percent of respondents believed that the BRI represented a net benefit for their countries, with just 17.8 percent viewing it as a net cost. On whether they felt China had deliberately set out to entrap their leaders, about 30 percent felt so but about 42 percent did not.⁵⁵ Many blamed domestic factors, such as corruption and reckless borrowing habits, for rising debt levels rather than participation in the BRI.

Yet the fact remains that China retains tremendous potential leverage over many BRI countries. As economist Megan Greene points out, the BRI coincided with a relatively benign period of easy monetary policy and ample liquidity.⁵⁶ Amid growing unease within China over the state of the economy, and particularly financial institutions’ role in fueling a real estate bubble, there is significant public sensitivity to debt-related issues and presumably little patience for China’s foreign debtors.⁵⁷

The feeling appears to be mutual in many BRI recipient countries. AidData notes that concerns over corruption and changing public sentiment toward China have led to more BRI projects being canceled.⁵⁸ The BRI also faces growing political opposition from China’s major rivals. These include India, whose regional interests the BRI most directly threatens, and the G7, which has announced a rival Build Back Better World infrastructure plan to mobilize private sector investment.⁵⁹

There are several reasons to be concerned that BRI debt could soon be enforced more ruthlessly or even activated as political leverage: Chinese domestic concerns, the potential end of China’s political honeymoon with major BRI recipient countries, and the intensification of U.S.-China competition globally. As always with the BRI, questions about corruption and political interference do not lend themselves to a simple narrative. What is certain is that the state-owned banks’ lending practices as described above—indiscriminate, opaque, and unaccountable—set the BRI up to become, as the scholar Jonathan Hillman has observed, “a global trail of trouble.”⁶⁰

Conclusion

Unlike some of the other SWFs examined in this report, China’s SAFE and CIC were not created or captured by political elites for the purposes of illicit self-enrichment—nor are their personnel directly involved in the day-to-day graft that afflicts so many BRI projects. On the contrary, they are major players in the global financial system in their own right.

But beyond their commercial mission to profitably invest China’s vast foreign exchange reserves, China’s SWFs and other state-owned financial institutions are also instruments of the CCP and its bid for global influence. In that role, they have provided and directed massive surges of capital that have flowed through the policy banks into BRI projects worldwide. This financing was arranged, in the vast majority of cases, without serious regard for due diligence or commercial viability, using secret contracts that have concealed the scale and seriousness of recipient countries’ potential liabilities.

China’s profligate use of its vast sovereign wealth to advance economic and political objectives has raised corruption risks not in just one country but 140 countries. Though the notion of deliberate debt-trap diplomacy has been brought into question, there remains a real and growing risk that China will exploit its financial leverage over BRI partners—whether to claim what it is owed while its own economy falters or to seize strategic advantages in its global race for influence against the United States.

Notes

¹ “Global Infrastructure Outlook: Infrastructure Investment Needs 50 Countries, 7 Sectors to 2040,” Global Infrastructure Hub, July 2017, https://outlook.gihub.org.

² Sailendra Pattanayak and Concha Verdugo-Yepes, “Protecting Public Infrastructure from Vulnerabilities to Corruption: A Risk-Based Approach” in Well Spent: How Strong Infrastructure Governance Can End Waste in Public Investment, eds. Gerd Schwartz, Manal Fouad, Torben Hansen, and Genevieve Verdier (Washington, DC: International Monetary Fund, 2020), https://www.imf.org/en/Publications/Books/Issues/2020/09/03/Well-Spent-How-Strong-Infrastructure-Governance-Can-End-Waste-in-Public-Investment-48603, 176.

³ “IMF’s Role in Infrastructure Governance,” International Monetary Fund, accessed July 12, 2023, https://infrastructuregovern.imf.org/content/PIMA/Home/IMFs-Role.html.

⁴ See, for example, “What Are the Main Criticisms of the World Bank and the IMF?” Bretton Woods Project, June 4, 2019, https://www.brettonwoodsproject.org/2019/06/what-are-the-main-criticisms-of-the-world-bank-and-the-imf/.

⁵ “Business and Finance Outlook 2018: The Belt and Road Initiative in the Global Trade, Investment and Finance Landscape,” Organisation of Economic Co-operation and Development, September 3, 2018, https://doi.org/10.1787/bus_fin_out-2018-6-en.

⁶ Chris Osborne, Nil Kalağoğlu, and Ömer Kama, “Project Financing Issues Along the BRI,” Commercial Dispute Resolution, September 21, 2021, https://iclg.com/cdr-essential-intelligence/1100-cdr-the-belt-and-road-initiative-2021/6-project-financing-issues-and-complications-along-the-bri.

⁷ Alex He, “The Belt and Road Initiative: Motivations, Financing, Expansion and Challenges of Xi’s Ever-Expanding Strategy,” Journal of Infrastructure, Policy and Development 4, no. 1 (2020): 140–143, https://systems.enpress-publisher.com/index.php/jipd/article/view/1180.

⁸ He, “Belt and Road Initiative.”

⁹ China Power Team, “How Much Trade Transits the South China Sea?,” Center for Strategic and International Studies, January 25, 2021, https://chinapower.csis.org/much-trade-transits-south-china-sea/

¹⁰ Ammar Malik et al., “Banking on the Belt and Road: Insights From a New Global Dataset of 13,427 Chinese Development Projects,” AidData, September 29, 2021, 22, https://www.aiddata.org/publications/banking-on-the-belt-and-road.

¹¹ “China Global Investment Tracker,” American Enterprise Institute, accessed August 2, 2023, https://www.aei.org/china-global-investment-tracker/.

¹² John Hurley, Scott Morris, and Gailyn Portelance, “Examining the Debt Implications of the Belt and Road Initiative From a Policy Perspective,” Center for Global Development, March 4, 2018, https://www.cgdev.org/publication/examining-debt-implications-belt-and-road-initiative-a-policy-perspective.

¹³ “Total Reserves (Includes Gold, Current US$)—China,” World Bank, accessed May 16, 2022, https://data.worldbank.org/indicator/FI.RES.TOTL.CD?locations=CN.

¹⁴ Marina Rudyak and Yunnan Chen, “China’s Lending Landscape, Approach to Debt and the Common Framework,” ODI, October 21, 2021, https://odi.org/en/publications/chinas-lending-landscape-and-approach-to-debt-relief/.

¹⁵ Malik et al., Banking on the Belt and Road, 24, 26, 124; and Jonathan Wheatley and James Kynge, “China Curtails Overseas Lending in Face of Geopolitical Backlash,” Financial Times, December 7, 2020, https://www.ft.com/content/1cb3e33b-e2c2-4743-ae41-d3fffffa4259.

¹⁶ Malik et al., Banking on the Belt and Road, 124.

¹⁷ Malik et al., Banking on the Belt and Road, 26.

¹⁸ Malik et al., Banking on the Belt and Road, 24.

¹⁹ Wheatley and Kynge, “China Curtails Overseas Lending in Face of Geopolitical Backlash.”

²⁰ Matt Schraeder and J. Michael Cole, “China Hasn’t Given Up on the Belt and Road,” Foreign Affairs, February 7, 2023, https://www.foreignaffairs.com/china/china-hasnt-given-belt-and-road.

²¹ Stephen Thomas and Ji Chen, “The Role of China’s Sovereign Wealth Funds in President Xi Jinping’s Ambitious Belt and Road Initiative,” in China's Belt and Road Initiative: Changing the Rules of Globalization, eds. Wenxian Zhang, Ilan Alon, and Christoph Lattemann (London: Palgrave Macmillan Cham, 2018): 300; Yuwei Hu, “Management of China’s Foreign Exchange Reserves: A Case Study on the State Administration of Foreign Exchange,” European Commission, January 2010, https://www.researchgate.net/publication/46447662_Management_of_China%27s_foreign_exchange_reserves_a_case_study_on_the_state_administration_of_foreign#pf9; and “About CIC,” China Investment Corporation, accessed May 16, 2022, http://www.china-inv.cn/chinainven/About_CIC/Who_We_Are.shtml.

²² Thomas and Chen, “Role of China’s Sovereign Wealth Funds.”

²³ Hu, “Management of China's Foreign Exchange Reserves.”

²⁴ William Norris, Chinese Economic Statecraft: Commercial Actors, Grand Strategy, and State Control (Ithaca, NY: Cornell University Press, 2016), 170.

²⁵ “About CIC,” China Investment Corporation.

²⁶ “CIC Released Annual Report 2020,” China Investment Corporation, August 27, 2021, http://www.china-inv.cn/chinainven/Media/2021-08/1001969.shtml.

²⁷ Hannah Reale, “China’s Trillion-Dollar Sovereign Wealth Fund,” Wire China, January 31, 2021, https://www.thewirechina.com/2021/01/31/chinas-trillion-dollar-sovereign-wealth-fund/.

²⁸ Erica Downs, “Inside China, Inc: China Development Bank’s Cross-Border Energy Deals,” Brookings Institution, March 2011, https://www.brookings.edu/wp-content/uploads/2016/06/0321_china_energy_downs.pdf.

²⁹ Thomas and Chen, “Role of China’s Sovereign Wealth Funds,” 292.

³⁰ Allen T. Cheng, “China’s CIC Boosts Direct Investments in Search of Returns,” Institutional Investor, September 5, 2016, https://www.institutionalinvestor.com/article/b14z9n33yv5ysy/chinas-cic-boosts-direct-investments-in-search-of-returns.

³¹ Zongyuan Zoe Liu, Sovereign Funds: How the Communist Party of China Finances Its Global Ambitions (Cambridge, Massachusetts: The Belknap Press of Harvard University Press, 2023), 124.

³² Liu, Sovereign Funds, 125.

³³ Liu, Sovereign Funds, 126.

³⁴ Rob Davies, “China Owns Vast Network of UK Real Estate, Offshore Records Reveal,” Guardian, January 27, 2023, https://www.theguardian.com/uk-news/2023/jan/27/china-owns-vast-offshore-network-uk-real-estate-records-reveal.

³⁵ Liu, Sovereign Funds, 124.

³⁶ Thomas and Chen, “Role of China’s Sovereign Wealth Funds,” 292.

³⁷ “Xi Jinping Vows Transparency Over Belt and Road,” BBC News, April 26, 2019, https://www.bbc.com/news/business-48061951.

³⁸ Yuen Yuen Ang, China’s Gilded Age: The Paradox of Economic Boom and Vast Corruption (Cambridge: Cambridge University Press, 2020).

³⁹ Rahul Karan Reddy, “China’s Anti-Corruption Campaign: Tigers, Flies, and Everything in Between,” Diplomat, May 12, 2022, https://thediplomat.com/2022/05/chinas-anti-corruption-campaign-tigers-flies-and-everything-in-between/.

⁴⁰ 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.

⁴¹ “China’s Anti-Graft Body Criticizes Central Bank, Regulators,” Bloomberg, February 24, 2022, https://www.bloomberg.com/news/articles/2022-02-24/china-antigraft-body-says-financial-agencies-lack-risk-awareness.

⁴² World Bank, Belt and Road Economics: Opportunities and Risks of Transport Corridors (Washington, DC: World Bank, 2019), 4–5.

⁴³ Jack Nolan and Wendy Leutert, “Signing Up or Standing Aside: Disaggregating Participation in China’s Belt and Road Initiative,” Brookings Institution, October 2020, https://www.brookings.edu/articles/signing-up-or-standing-aside-disaggregating-participation-in-chinas-belt-and-road-initiative/.

⁴⁴ Malik et al., Banking on the Belt and Road, 21.

⁴⁵ Yang Yutong, “China-Africa Ties: ‘Five Nos’ and Eight Initiatives for the New Era,” CGTN, September 7, 2018, https://news.cgtn.com/news/3d3d674d344d444d7a457a6333566d54/share_p.html.

⁴⁶ Will Doig, “The Belt and Road Initiative Is a Corruption Bonanza,” Foreign Policy, January 15, 2019, https://foreignpolicy.com/2019/01/15/the-belt-and-road-initiative-is-a-corruption-bonanza/.

⁴⁷ Malik et al., Banking on the Belt and Road, 56.

⁴⁸ Anna Gelpern et al., “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.

⁴⁹ Shashank Bengali, “How an Island Nation’s New Leaders Are Trying to Unravel a Web of Secret Deals With China,” Los Angeles Times, November 6, 2018, https://www.latimes.com/world/asia/la-fg-maldives-china-20181106-story.html.

⁵⁰ Mercy A. Kuo, “China’s BRI Lending: $385 Billion in ‘Hidden Debts’,” Diplomat,

November 29, 2021, https://thediplomat.com/2021/11/chinas-bri-lending-385-billion-in-hidden-debts/.

⁵¹ Jeremy Birch, Kyle Wombolt, and Tracy Cui, “In Brief: Foreign Bribery Laws in China,” Lexology, February 19, 2021, https://www.lexology.com/library/detail.aspx?g=b26a3adf-2872-4d0f-87ae-996f3a6c5962.

⁵² Dipanjan Roy Chaudhury, “World Bank Bans Chinese Companies Again for Financial Crimes,” Economic Times, August 23, 2019, https://economictimes.indiatimes.com/news/international/business/world-bank-bans-chinese-companies-again-for-financial-crimes/articleshow/70797062.cms.

⁵³ Maria Abi-Habib, “How China Got Sri Lanka to Cough Up a Port,” New York Times, June 5, 2018, https://www.nytimes.com/2018/06/25/world/asia/china-sri-lanka-port.html.

⁵⁴ Lee Jones and Shahar Hameiri, “Debunking the Myth of ‘Debt-Trap Diplomacy: How Recipient Countries Shape China’s Belt and Road Initiative,” Chatham House, August 19, 2020, https://www.chathamhouse.org/2020/08/debunking-myth-debt-trap-diplomacy/5-malaysia-and-bri; and Tom Wright and Bradley Hope, “China Offered to Bail Out Troubled Malaysian Fund in Return for Deals,” Wall Street Journal, January 7, 2019, https://www.wsj.com/articles/how-china-flexes-its-political-muscle-to-expand-power-overseas-11546890449.

⁵⁵ Pradumna B. Rana and Xianbai Ji, “Belt and Road Stakeholders Don’t Believe China Uses ‘Debt-Trap Diplomacy’,” Diplomat, November 6, 2020, https://thediplomat.com/2020/11/belt-and-road-stakeholders-dont-believe-china-uses-debt-trap-diplomacy/.

⁵⁶ Megan Greene, “The G7 Is Right to Worry About Chinese Credit Terms,” Financial Times, June 17, 2021, https://www.ft.com/content/301dbc55-8a76-4ac3-bf06-0dce0527ce00.

⁵⁷ Jeremy Mark, “China’s Real ‘Debt Trap’ Threat,” Atlantic Council, December 13, 2021, https://www.atlanticcouncil.org/blogs/new-atlanticist/chinas-real-debt-trap-threat/.

⁵⁸ Malik et al., Banking on the Belt and Road, 73.

⁵⁹ Andrew Small, “The Backlash to Belt and Road,” Foreign Affairs, February 16, 2018, https://www.foreignaffairs.com/articles/china/2018-02-16/backlash-belt-and-road; and Steve Holland and Guy Faulconbridge, “G7 Rivals China With Grand Infrastructure Plan,” Reuters, June 12, 2021, https://www.reuters.com/world/g7-counter-chinas-belt-road-with-infrastructure-project-senior-us-official-2021-06-12/.

⁶⁰ Jonathan E. Hillman, “Corruption Flows Along China’s Belt and Road,” Center for Strategic and International Studies, January 18, 2019, https://www.csis.org/analysis/corruption-flows-along-chinas-belt-and-road.

Citizenship by Investment (CBI) programs, better known as “golden passport” schemes, are not new. They have long enabled the ultra-wealthy, including the very corrupt, to evade scrutiny for misdeeds, hide assets, and acquire international mobility. Cyprus, the United Kingdom, the United States, and much of the Caribbean have citizenship or residency programs through investments.¹ What sets the Maltese CBI program apart is that the revenues generated from passport sales have been used to fund its sovereign wealth fund (SWF).²

To fully understand why an SWF that is financed through the sale of passports is an especially high-risk investment vehicle for corruption, this chapter first examines the strength and transparency of the Maltese CBI program, as well as the reputation that similar programs in other countries have garnered. An SWF that runs a high risk of being funded using corrupt, laundered, or ill-gotten wealth strikes at the heart of what the SWF represents by creating a dependency on potential 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 an SWF provides.

A “Corrupting Island in a Corrupting Sea”

Malta is a small island in the Mediterranean Sea, which, despite its EU member state status since 2004, has been referred to as a “corrupting island in a ‘corrupting sea’” and has had a “disproportionate role as a hub for transnational illicit flows and criminal activities.”³ This is in part due to its low level of law enforcement resources and its location as a gateway between North Africa and Europe,⁴ which have given it a long history as a smuggling “logistical hub”⁵ and “smugglers’ hideout.”⁶ But Malta’s reputation also stems from its documented history of state capture by elites networked into long-standing organized crime and corruption networks.⁷ Its Corruption Perceptions Index score (54 out of a possible 100) is far below the Western European average of 66.⁸

Malta’s notoriety as a corrupt country with declining rule of law norms came into international prominence on October 16, 2017, when Maltese investigative journalist Daphne Caruana Galizia was assassinated by a hitman using a car bomb. Galizia’s murder brought the extent and scope of corruption in Malta to the attention of a much wider public.⁹ Starting in 2016, when she was able to access information from the law firm Mossack Fonseca as a part of the Panama Papers leak, Galizia had begun to map out corrupt networks that she and other investigative journalists alleged went all the way to the top of the Maltese elite—including Joseph Muscat, who was prime minister from 2013 to 2020.¹⁰

Among the various corruption and organized crime–related cases she was investigating at the time of her death was Malta’s sale of so-called golden passports,¹¹ which Muscat had been actively promoting, especially at “citizenship seminars” in numerous locations, including Beirut and Dubai.¹²

Malta has had a variety of CBI programs; the 2014 iteration was called the Individual Investment Program (IIP). An individual could be eligible for Maltese citizenship and a passport if they invested 650,000 euros ($864,500) into Malta’s SWF; purchased 150,000 euros ($199,500) of Maltese stocks or shares; bought a property worth at least €350,000 ($465,500); or paid at least €16,000 ($21,280) to rent one, in addition to maintaining resident status in Malta for at least twelve months (though they were not required to actually live in Malta during those twelve months). Citizenship for family members required further investments. From mid-2017 to mid-2018 alone, the scheme brought in €162 million ($186.3 million), which was about 1.38 percent of Malta’s gross domestic product.¹³

After payments and investments totaling €1.15 million, one could become a full-fledged citizen of the European Union (EU) with a passport and all the accompanying citizenship and travel opportunities.¹⁴ Applicants were supposed to be fully vetted for security risks. These due diligence checks were vitally important given that Malta is a member of both the EU and its Schengen Agreement. From 2014 to 2019, Malta granted citizenship to 833 investors and 2,109 family members.¹⁵

Citizenship by Investment Schemes and Residency by Investment Schemes

As this compilation has repeatedly noted, SWFs are normally used to take excess funds—usually from the sale of natural resources—and invest them outside of the country as a means to diversify the economy, create jobs and other opportunities for the country’s citizens, and generate wealth for future generations. However, the cases of both Malta and Türkiye (see chapter 8) highlight the unique potential for funds established without sovereign wealth to be exploited. Türkiye has funded its SWF via the takeover of state-owned enterprises and debt, and Malta has funded its SWF in large part through its CBI scheme.

CBI schemes—as well as Residency by Investment (RBI), or “golden visa,” schemes—aim to attract foreign investment from high-net-worth individuals in return for citizenship and residency rights, respectively.¹⁶ The earliest adopters of these types of schemes were Tonga and the Caribbean nation of Saint Kitts and Nevis.¹⁷ Today, many countries offer such programs, including Australia, the United Kingdom, and the United States.¹⁸

Although each country’s schemes are unique in terms of participation requirements and the rights granted in exchange, they all share a common goal of boosting the domestic economy.¹⁹ CBI and RBI programs became increasingly attractive to EU member states following the 2007–2008 global financial crisis as a seemingly easy way to support local economies.

For outsiders, EU citizenship affords visa-free travel to up to 182 countries.²⁰ It is these rights, in particular the freedom of movement of persons and capital, that are often advertised as the main attractive features of such schemes. The rationale, according to investment advisory firm Renascence Capital, is that “investment migration enables wealthy individuals to transcend the constraints imposed on them by their passport and country of origin, tapping into financial, career, and educational opportunities on a global scale.”²¹

Supporters argue that there are legitimate reasons for golden passport schemes. While this may be true, paying just over €1 million for all the benefits that an EU passport entails can also be a very good deal for the criminal and corrupt. Individuals involved in organized crime and corruption who obtain an EU passport are then able to travel throughout the world. Their EU citizenship status may allow them to conduct banking and business under looser standards than would be required under their original passports. These individuals receive all of the rights to privacy and rule of law and protections against any expropriations that are accorded to EU citizens. 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. 

Because of the significant risks associated with CBI and RBI programs, SWFs capitalized through these structures can become conduits for bypassing standard transparency checks applied in normal financial transactions and banking relationships, thereby serving as a mechanism for tainted funds to enter the domestic and international financial systems.

Funds transferred from Malta, an EU country, to a third country such as the United Kingdom or United States may be deemed lower risk than they would be if the same transfer was made from the CBI holder’s original country of nationality, which facilitates the laundering or transfer of illicitly obtained funds. In this way, the reputation of the individual may be rehabilitated and any risk based on their nationality may be concealed, allowing for the placement, layering, and integration of funds that would otherwise be unable to enter the EU’s financial system.

Investment flows from CBI and RBI schemes can also hurt financial stability and raise the demand for and prices of real estate for locals.²² In a 2018 report, the European Parliament stated that the social impacts from CBI programs could also make it more difficult for low-income sections of the population to access housing as property prices increase.²³

The national security and money laundering risks are even greater. Current criminal background checks and other due diligence performed on the applicants for golden passports or visas and the sources of their funds have been “questionable” at best.²⁴ The European Parliament noted that “CBI/RBI schemes tend to be located in Member States that are particularly prone to risks related to financial secrecy, such as tax avoidance and money laundering, and corruption.”²⁵

Despite the four-tier due diligence process established to vet applicants, several high-profile Russian individuals with political ties to Russia obtained citizenship through Malta’s IIP between 2016 and 2018.²⁶ For example, in 2016, Arkady Volozh, the founder and chief executive officer of Russia’s top search engine, Yandex (known as the “Google of Russia”), purchased Maltese citizenship for himself and his family.²⁷ Also that year, Alexey Alexandrovich Marey, the former chief executive officer of now sanctioned Alfa-Bank Russia (the largest private bank in Russia), and his family became Maltese citizens.²⁸ Maxim Shubarev, chairman of Setl Group (one of Russia’s largest financial and industrial associations), was also able to buy a Maltese passport in 2018.²⁹ Pavel Grachev, the chief executive officer of Polyus Gold (the largest producer of gold in Russia and one of the world’s largest gold mining companies), purchased Maltese passports for himself and his family in 2017.³⁰ According to a news report, “almost half of his declared net worth of €42 million [$47.46 million] is derived from a single ‘bonus payment’ of €20 million [$22.6 million] paid to him by a BVI shell company, Ninelco Investments Ltd.”³¹ These names are just a few of the over 700 Russians that by 2018 were able to purchase Maltese citizenship.³²

The EU has recognized the risks of CBI programs, as noted in its fifth anti–money laundering directive. The directive notes that CBI schemes demonstrate a potentially “higher risk” for money laundering.³³ And the European Parliament has specifically warned about the risks associated with Malta’s IIP, including the likelihood of money laundering, the Maltese authorities’ lack of appetite for taking action, and the program’s inadequate due diligence process.

These concerns gained more visibility in 2022 following the Russian invasion of Ukraine, as the public has become more aware of the estimated 3 billion or more euros invested into Europe by Russian nationals using these schemes. These investments resulted in more than 4,000 Russian nationals receiving residency or citizenship in the EU.³⁴ Most EU member states, Malta included, ceased accepting applications for golden passports or visas from Russian nationals following the invasion.³⁵

Malta’s Citizenship by Investment Programs

Following scrutiny from the European Commission and domestic pressures linked to the murder of Galizia, Malta closed its IIP in 2020, stating it had reached its application cap.³⁶ However, in November 2020, Malta launched a new CBI program that offers citizenship through extraordinary service to Malta or through investments. In addition to a cap of 400 certificates of naturalization per annum and 1,500 in total, excluding dependents, the new program has slightly more robust residency requirements.³⁷

Yet the closing of the IIP did not put an end to the scrutiny. In April 2021, a series of investigative journalism stories were published based on leaks from the citizenship advisory firm Henley & Partners, which has been intimately linked with Malta’s CBI programs since the program’s inception. These leaks revealed, for instance, that Saudi Prince Bandar Al Saud’s name was never published in Malta’s citizenship registry after he received citizenship in 2017.³⁸

Saudis cannot receive dual citizenship without Saudi government permission, which is rarely granted. As a result, this case has called the accuracy of Malta’s public citizenship registry into question.³⁹

The same leaks revealed that citizenship applicants tended to come from states with a higher risk of money laundering. A plurality of applicants came from Russia (37 percent), followed by China (12 percent) and Saudi Arabia (10 percent).⁴⁰ Some applicants already held second passports, including citizenship from Saint Kitts and Nevis.

The leaks also revealed that one of Henley & Partners’ highest-profile clients was Low Taek Jho, better known as Jho Low, the mastermind behind the Malaysia 1MDB corruption scandal (see chapter 3). Henley & Partners denied that Low was their client; while he sought a Maltese passport through the firm, they stated that he was not eligible for their programs due to the reputational risk of having him as a client. Yet a subsidiary of the firm reportedly helped Low purchase real estate in Cyprus through a Cypriot CBI scheme, and in return, the subsidiary company received a €650,000 ($721,500) commission for the purchase plus at least €60,000 ($66,600) in other fees.⁴¹

Moreover, many applicants spent only a few days total in Malta or rented empty apartments. In one case, an individual from the United Arab Emirates was able to arrive in the morning, take his oath of allegiance as a new citizen, and leave the country again all within a mere nine hours.⁴² Another citizenship applicant asked the law firm for the cheapest possible citizenship options that would meet the program’s demands. A yacht could be rented in Malta to prove a residency link.⁴³ Henley & Partners has responded that it is not their responsibility to vet applicants—that is up to the receiving country.⁴⁴ Other news reports from 2018 and 2019 revealed that a “Russian who was allegedly at the center of a money laundering scheme” and an Egyptian “arrested in New York on alleged fraud charges”⁴⁵ were both given Maltese citizenship.⁴⁶ In 2018, the European Parliamentary Research Service calculated that from 2014 to 2016 “more than 38% of all naturalisations in Malta were obtained via their CBI scheme.”⁴⁷

In October 2020, the European Union sent Malta an official notice to end the scheme, citing the lack of genuine link requirements for applicants as a violation of EU law.⁴⁸ In April 2022, the EU threatened legal action because, unlike other countries with CBI programs, Malta had not ceased its program, though it had blocked Russians and Belarusians from applying.⁴⁹

The Maltese National Development and Social Fund

It is against this backdrop that the money laundering and corruption risks associated with channeling money from the CBI program into Malta’s SWF must be examined. Malta’s SWF, the Maltese National Development and Social Fund (NDSF), was established in 2015 as part of the 2014 IIP program.⁵⁰

The NDSF was created with broad national development and social goals. These include contributing to major projects of national importance; promoting and supporting the advancement of education, research, innovation, justice and the rule of law, employment, and public health; encouraging gender equality; preventing discrimination; and respecting human rights.⁵¹

Despite these laudable aims, what bears scrutiny is the source of money by which Malta’s national development and social goals are funded. According to the NDSF’s website, until April 2020, when the IIP program was wound down, 70 percent of all contributions received through passport sales were managed and administered by the NDSF (see figure 1).⁵²

The NDSF’s most recent publicly available financial statements show net assets that total €598.1 million.⁵³ These proceeds are allocated across three portfolios: a directed portfolio (70 percent), a discretionary portfolio (30 percent), and an unallocated portfolio (cash balances).⁵⁴ Each portfolio has its own unique management structures.

The discretionary portfolio receives 30 percent of all funds from the CBI program. Management of the portfolio, according to the NDSF annual report, has been assigned to an unnamed “leading global investment manager” by the Central Bank of Malta.⁵⁵ This is atypical for SWFs (at least those that follow best practices). Both Norway’s SWF and Singapore’s GIC fund name their investment managers on their websites.⁵⁶ Even Angola’s SWF (see chapter 4) publicly named Quantum Global as the fund’s asset manager. Providing basic information about the investment manager would give assurance of the reputation and standards that will be in place for NDSF investments. Additionally, providing the manager’s name allows for independent oversight, as it did in the case of Angola’s SWF, where journalists were able to expose the many conflicts of interest and poor financial integrity standards surrounding the fund’s former asset manager.

From a money laundering standpoint, what is relevant is that the discretionary portfolio includes “solely investments in high-quality foreign instruments.”⁵⁷ As a state-sponsored investment vehicle, the fund has easy access to North American and EU assets with few questions asked despite the numerous risks associated with NDSF money. Typically, 80 percent of the discretionary portfolio is allocated to foreign bonds, with the remainder allocated to foreign equity.⁵⁸ In 2020, 6.5 percent of these funds were directly invested in U.S. equities with a similar amount directed into emerging market (EM) equity funds (see figure 2).

The directed portfolio, which contains 70 percent of the funds that the NDSF receives from the CBI program, is supposed to be used for social and development purposes. The fund acknowledges that these investments may not necessarily provide a direct financial return to the NDSF.⁵⁹ As of December 31, 2020, this portfolio had a market value of €260 million ($297 million) and consisted solely of domestic assets listed on the Malta Stock Exchange.⁶⁰ The total market capitalization of the Maltese stock exchange is $4.34 billion, meaning that the NDSF owns close to 6 percent of all of the value in the stock exchange. This is worrying, as a significant chunk of domestic investment and, in turn, the strength and stability of Malta’s stock market comes from money obtained through passport sales in a program that is at high risk for corruption. 

Despite the stated allocations of funds to be held in the directed and discretionary portfolio, 40 percent of the total NDSF assets is held in cash ($259.2 million)⁶¹ This is a remarkably high amount of cash for an SWF to have on hand.⁶² Funds like the NDSF whose mandates include priorities such as “the advancement of education, research, innovation, social purposes”⁶³ and so on are referred to as strategic development SWFs. Because the NDSF has also been used to shore up the country’s budget deficit, it also seems to serve as a kind of stabilization fund. But analysis of investment strategies across different fund types indicates that stabilization funds tend to keep over 50 percent as cash and cash equivalents.⁶⁴ Strategic development funds on the other hand “tend to invest up to 50 percent of their assets domestically, with the difference globally spread across fixed income securities, public equities and cash equivalents, and private market investments.”⁶⁵ This investment strategy also seems to largely mirror that of the NDSF. But strategic development funds tend to invest on average only 10 percent of their assets under management in cash or cash equivalents. The amount of unallocated cash in the NDSF’s budget given the fund’s stated purpose is surprising. If the cash is unallocated and does not earn interest, and if the law does not specify guard rails for its use, those are significant red flags for potential corruption and mismanagement.

Finally, as other chapters in this report have highlighted, minimizing potential conflicts of interest between those tasked with managing investments and the areas that the fund is investing in is critical to mitigate corruption risks. With the NDSF, the governance structure of the fund raises concerns. As displayed in figure 3, David Curmi, who was the NDSF’s chairman from 2015 to 2021, had individual interests in several companies that NDSF also had stakes in. ⁶⁶

Per the Paradise Papers, David Curmi either currently serves or has served on the boards of multiple Maltese companies, including Growth Investments Limited, Tigne’ Point Marketing, Mapfre Middlesea, Middlesea Assist, Premium Realty, Tigne’ Contracting, Midi, LB Factors, and Plaza Centers. While some of the entities are publicly traded, others are subsidiaries that can be traced back to the NDSF through either ownership or shared investments. For example, Premium Realty is owned by a consortium of companies that includes MSV Life. Curmi has served on the boards of both companies and on that of one of MSV Life’s parent companies, Mapfre Middlesea (a publicly traded entity).

The other owner of MSV Life, Bank of Valetta, is a publicly traded company in which the NDSF holds an equity interest. As a result, multiple parties have made investments into companies in which Curmi exerts a certain degree of influence. There is nothing inherently illegal about this significant overlap in investment choices. However, from a governance and anti-corruption standpoint, it raises questions about the independence and oversight mechanisms used for the investment decisionmaking process within the fund.⁶⁷

The Profitability of “Mining Sovereignty”

It is striking how profitable “mining sovereignty” has been for the Maltese government. Malta had a year-over-year budget deficit from the early 1990s until about 2015. The deficit rapidly shrank following the introduction of the IIP in 2013, and in 2017, the country’s budget surplus was €438.6 million ($495.6 million)—as one article stated, this amounted to “an astonishing 3.9% of GDP, higher than any other EU country, and fourth highest in the world.”⁶⁸ The same article went on to say that 90 percent of this surplus was attributable to the revenue generated from passport sales. Reportedly, as tweeted by Muscat, within four years of the program, the country was able to reverse the deficit created by the three previous administrations. To some commentators, this may seem like shrewd economic policy, but from an anti-corruption standpoint, this indicates that there is little incentive to adhere to the highest standards for processing applicants in the CBI program.

The NDSF’s capitalization via the golden passport scheme also means that the SWF is directly intertwined with Malta’s CBI. The risks of the NDSF’s direct capitalization from Malta’s CBI can be inferred from the European Parliament’s 2018 report on CBI and RBI schemes, which noted that these schemes were typically located in in member states with heightened risks of tax avoidance, money laundering, and corruption.⁶⁹ This again highlights a potential reputational risk for the NDSF because of its close association with and direct capitalization from a CBI scheme.⁷⁰

NDSF’s complex relationship with corruption risks does not involve only the source of its funds but also how its investments have been structured; the investments are deeply embedded into the Maltese economy and can therefore threaten its stability. For instance, in 2018, the NDSF acquired a 49 percent stake in Lombard Bank, one of Malta’s largest banking institutions. In the same year, the Maltese SWF was considered the forty-third-largest SWF in the world by assets under management.⁷¹ The CBI program allowed the NDSF to grow incredibly profitable—to the point that it recorded a balance of half a billion U.S. dollars in 2018, which placed it “on par with the sovereign wealth fund of Vietnam . . . a country of nearly 100 million people with an economy 20 times the size of Malta’s.”⁷² However, since the coronavirus pandemic, the NDSF’s assets under management have fallen sharply, and the fund now ranks as the ninetieth-largest SWF in the world.⁷³

Nonetheless, surveys show that only a minority (26 percent) of Maltese citizens support the sale of citizenship.⁷⁴ The European Parliament report makes the case that “the vulnerabilities associated with CBI/RBI schemes . . . can negatively affect the population’s trust in the institutions.” The report also noted that a Eurobarometer survey carried out in November 2017, not long after Galizia was murdered, “showed that the Maltese citizens trust the justice system and police less than the EU average: trust in the Maltese justice and legal system stands at 35%, which is less than the EU average of 50%. The police are trusted at a level of 53%, also below the 72% EU average.”⁷⁵ The authors recognize that “it is difficult to determine a direct causal link,” but “arguably the multiplication of allegations and ongoing investigations in Malta probably have an impact on its population.”⁷⁶ If so, one must wonder what impact this has on the viability of funding an SWF through the proceeds of a CBI program and whether the Maltese authorities will need to reconsider the manner in which the NDSF is funded.

The European Union is closing its remaining CBI programs, but plenty of other CBI programs endure around the world, and they may provide many of the same benefits and risks to the international system as Malta’s program. 

While the goals of such programs—to provide additional investments and jobs—are laudable, the risks associated with them are extremely high. As argued in this chapter, funding a state’s SWF through potentially illicit proceeds undermines a country’s rule of law and its citizens’ 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. Further, such funding approaches can create perverse incentives whereby states come to rely on illicit funding to stay afloat. Current Maltese Prime Minister Robert Abela noted that maintaining Malta’s CBI program, even in the face of EU pressure, enabled the country to create a budgetary buffer from coronavirus challenges: “We will be defending Malta. Had it not been for the contributions from that [CBI] programme, which we are in the process of winding down, we would probably not have been in a position to present a budget of this scale.”⁷⁷

The modus operandi of the NDSF also raises significant concerns about the way money held in state-owned investment vehicles is able to move through the international financial system with reduced scrutiny, as it is assumed that the source of funds is legitimate. CBI and RBI schemes can lead to very real risks to the larger international system, especially when they are run by states like Malta that appear especially vulnerable to criminal state capture. 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 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 power brokers in ways that may undermine larger national security considerations—as the public outing of Russian oligarchs’ roles in state capture and in undermining the West has made clear.

Notes

¹ Svetlana Gorchakova, “EU Citizenship by Investment: Terms, Prices, Pitfalls,” Immigrant Invest, May 17, 2021, https://immigrantinvest.com/blog/grazhdanstvo-es-za-investicii-en/.

² “Annual Report 2020,” National Development and Social Fund, 2021, https://ndsf.com.mt/wp-content/uploads/2023/08/Annual-Report-2020.pdf.

³ Luca Ranieri, “The Malta Connection: A Corrupting Island in a ‘Corrupting Sea’?,” European Review of Organized Crime 5, no. 1 (2019): 10–35, 1–2, https://www.academia.edu/38695979/Raineri_The_Malta_Connection_A_Corrupting_Island_in_a_Corrupting_Sea_.

⁴ Ranieri, “Malta Connection,” 3.

⁵ Ranieri, “Malta Connection,” 8.

⁶ Cecilia Anesi, Lorenzo Bagnoli, and Giulio Rubino, “Malta, A Modern Smugglers’ Hideout,” Organized Crime and Corruption Reporting Project, October 10, 2018, https://www.occrp.org/en/thedaphneproject/malta-a-modern-smugglers-hideout.

⁷ Stephen Grey, “Special Report—The Silencing of Malta’s Anti-Corruption Campaigner,” Reuters, April 17, 2018, https://www.reuters.com/article/uk-malta-daphne-specialreport-idUKKBN1HO2QW; and Sophie Claudet and Everton Gayle, “Malta Is a Captured State, Say Sons of Daphne Caruana Galizia,” Euronews, May 31, 2018, https://www.euronews.com/2018/05/29/malta-is-a-captured-state-say-sons-of-daphne-caruana-galizia.

⁸ “Malta Registers Insignificant Progress in Corruption Perception Index,” Malta Independent, accessed July 12, 2023, https://www.independent.com.mt/articles/2022-01-25/local-news/Malta-registers-insignificant-progress-in-Corruption-Perception-Index-6736240067.

⁹ Darren Mara, “The Murder of a Top Investigative Journalist Rocked Malta. Reporters There Say They’re Still in Danger,” SBS News, March 22, 2022, https://www.sbs.com.au/news/dateline/article/the-murder-of-a-top-investigative-journalist-rocked-malta-reporters-there-say-theyre-still-in-danger/rkxseuoiw.

¹⁰ David Klein, “Amidst Corruption Probe, Police Raid Maltese Ex-PM’s Home,” Organized Crime and Corruption Reporting Project, January 21, 2022, https://www.occrp.org/en/daily/15810-amidst-corruption-probe-police-raid-maltese-ex-pm-s-home.

¹¹ Lorenzo Bagnoli, “Murdered Maltese Journalist Was Investigating Island’s Golden Visas,” Organized Crime and Corruption Reporting Project, April 18, 2018, https://www.occrp.org/en/thedaphneproject/murdered-maltese-journalist-was-investigating-islands-golden-visas.

¹² Ben Taub, “Murder in Malta,” New Yorker, December 14, 2020, https://www.newyorker.com/magazine/2020/12/21/murder-in-malta.

¹³ 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.

¹⁴ Giles, “Malta’s ‘Golden Passports.’

¹⁵ Giles, “Malta’s ‘Golden Passports.’”

¹⁶ Amandine Scherrer and Elodie Thirion, “Citizenship by Investment (CBI) and Residency by Investment (RBI) Schemes in the EU: State of Play, Issues and Impacts,” European Parliament, October 2018, https://data.europa.eu/doi/10.2861/10673.

¹⁷ Anthony Van Fossen, “Passports of Convenience From the Pacific Islands,” Lowy Institute, December 21, 2017, https://www.lowyinstitute.org/the-interpreter/passports-convenience-pacific-islands; Scherrer and Thirion, “Citizenship by Investment (CBI) and Residency by Investment (RBI) Schemes in the EU”; and Anthony Van Fossen, “Citizenship for Sale: Passports of Convenience From Pacific Island Tax Havens,” Commonwealth & Comparative Politics 45, no. 2 (2007): 141, https://doi.org/10.1080/14662040701317477.

¹⁸ Alan Gamlen, Chris Kutarna, and Ashby Monk, “Citizenship as Sovereign Wealth: Re-Thinking Investor Immigration,” Global Policy 10, no. 4 (2019): 527–541, https://doi.org/10.1111/1758-5899.12723; and “EB-5 Immigrant Investor Program,” U.S. Citizenship and Immigration Services, September 29, 2022, https://www.uscis.gov/working-in-the-united-states/permanent-workers/eb-5-immigrant-investor-program.

¹⁹ Scherrer and Thirion, “Citizenship by Investment (CBI) and Residency by Investment (RBI) Schemes in the EU.”

²⁰ Laure Brillaud and Maíra Martini, “European Getaway: Inside the Murky World of Golden Visas,” Transparency International and Global Witness, 2018, 31, https://images.transparencycdn.org/images/2018_report_GoldenVisas_English.pdf.

²¹ “Immigration by Investment,” Renascence Capital, accessed September 10, 2022, https://www.renascence-capital.com/immigration.

²² Scherrer and Thirion, “Citizenship by Investment (CBI) and Residency by Investment (RBI) Schemes in the EU,” 6.

²³ Scherrer and Thirion, “Citizenship by Investment (CBI) and Residency by Investment (RBI) Schemes in the EU.”

²⁴ Scherrer and Thirion, “Citizenship by Investment (CBI) and Residency by Investment (RBI) Schemes in the EU.”

²⁵ “Draft Report With Proposals to the Commission on Citizenship and Residence by Investment Schemes,” European Parliament Committee on Civil Liberties, Justice and Home Affairs, November 9, 2021, https://www.europarl.europa.eu/doceo/document/LIBE-PR-697745_EN.pdf, 6.

²⁶ Jacob Borg, “A Look at Some of the Rich Russians Drawn to a Maltese Passport,” Times of Malta, March 9, 2022, https://timesofmalta.com/articles/view/a-look-at-some-of-the-rich-russians-drawn-to-a-maltese-passport.939129.

²⁷ Tim Diacono, “Owner Of ‘Russia’s Google’ Is Now A Maltese Citizen,” Lovin Malta (blog), January 10, 2018, https://lovinmalta.com/news/owner-of-google-of-russia-is-now-a-maltese-citizen/.

²⁸ Borg, “A Look at Some of the Rich Russians Drawn to a Maltese Passport.”

²⁹ Nicole Meilak, “[WATCH] Russian Billionaire With Malta Passport Parks Superyacht in Birgu,” MaltaToday, March 4, 2022, http://www.maltatoday.com.mt/news/national/115373/russian_billionaire_with_malta_passport_parks_superyacht_in_birgu.

³⁰ “Pavel Grachev,” Passport Papers, accessed November 13, 2023, https://www.daphne.foundation/passport-papers/profiles/pavel-grachev.

³¹ “Pavel Grachev,” Passport Papers.

³² Tim Diacono, “Did Malta’s Cash for Passports Scheme Damage Putin More Than We Thought?” Lovin Malta (blog), January 11, 2018, https://lovinmalta.com/news/did-maltas-cash-for-passports-scheme-damage-putin-more-than-we-thought/.

³³ “Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 Amending Directive (EU) 2015/849 on the Prevention of the Use of the Financial System for the Purposes of Money Laundering or Terrorist Financing, and Amending Directives 2009/138/EC and 2013/36/EU (Text with EEA Relevance),” 156 OJ L § (2018), http://data.europa.eu/eli/dir/2018/843/oj/eng; see Annex III, which notes that customer risk factors include “customer is a third country national who applies for residence rights or citizenship in the Member State in exchange of capital transfers, purchase of property or government bonds, or investment in corporate entities in that Member State”; “Investor Citizenship and Residence Schemes in the European Union.”

³⁴ Clara Hernanz Lizarraga, “Russia’s War Puts Europe’s ‘Golden Passports’ Under Microscope,” Bloomberg, March 15, 2022, https://www.bloomberg.com/news/articles/2022-03-15/russia-s-war-puts-europe-s-golden-passports-under-microscope.

³⁵ Chris Scicluna and Tomasz Janowski, “Malta Stops Sale of Passports to Russians, Belarusians,” Reuters, March 2, 2022, https://www.reuters.com/world/malta-stops-sale-passports-russians-belarusians-2022-03-02/.

³⁶ Andres Gutierrez, “As Malta Plans to Renew the IIP in 2020, Which Changes Should We Expect?,” Investment Migration Insider (blog), May 7, 2020, https://www.imidaily.com/europe/as-malta-plans-to-renew-the-iip-in-2020-which-changes-should-we-expect/.

³⁷ “The Maltese Citizenship by Naturalization for Exceptional Services by Direct Investment,” PwC, https://www.pwc.com/mt/en/assets/Citizenship-Brochure.pdf. Individuals wishing to apply for citizenship must first satisfy a residency requirement of thirty-six months with a €600,000 payment or of twelve months with a €750,000 payment, plus an additional €50,000 contribution per dependent in each case. During this residency period, applicants are expected to build links to their new country. There is also a requirement to purchase real estate valued at €700,000 or more (up from €350,000 in the 2014 CBI scheme) or rent a property at a minimum cost of €16,000 per year, but the property or rental now must be held for five years from the date of confirmed naturalization. An additional requirement is a donation of €10,000 to a registered philanthropic or cultural agency approved by the Community Malta Agency. Finally, the applicant cannot be subject to sanctions or criminal investigation at the time of application and should expect due diligence checks.

³⁸ He had personally met with Muscat and the head of Malta’s CBI program and received their promise not to publish his name.

https://www.daphne.foundation/passport-papers/profiles/bander-al-saud

³⁹ Jacob Borg, “Passport Papers: Saudi Prince Secured Secret Passport After Muscat Meeting,” Times of Malta, April 21, 2021, https://timesofmalta.com/articles/view/passport-papers-saudi-prince-secured-secret-passport-after-muscat.866304.

⁴⁰ Sabriyah Saeed, “What We Know About the Nationalities of Passport Applicants,” Passport Papers, April 21, 2021, https://www.daphne.foundation/passport-papers/2021/04/applicant-nationalities.

⁴¹ “Low Taek Jho,” Passport Papers, accessed September 11, 2022, https://www.daphne.foundation/passport-papers/profiles/jho-low.

⁴² Jacob Borg and Matthew Xuereb, “Exposed: The Great Residency Sham to Obtain a Maltese Passport,” Times of Malta, April 21, 2021, https://timesofmalta.com/articles/view/exposed-the-great-residency-sham-to-obtain-a-maltese-passport.866220.

⁴³ Borg and Xuereb, “Exposed”; and “Malta Golden Passports: ‘Loopholes’ Found in Citizenship Scheme,” BBC News, April 22, 2021, https://www.bbc.com/news/world-europe-56843409.

⁴⁴ “Malta Golden Passports,” BBC News.

⁴⁵ Scherrer and Thirion, “Citizenship by Investment (CBI) and Residency by Investment (RBI) Schemes in the EU,” 28–29; and “Sixth Annual Report on the Individual Investor Programme of the Government of Malta,” Office of the Regulator Individual Investor Programme (ORiip), November 2019, 27, https://orgces.gov.mt/en/Documents/Reports/Annual%20Report%202019.pdf.

⁴⁶ The Maltese regulator rejects any suggestions that sufficient due diligence is not carried out on applicants, noting that the 75 percent success rate for applicants to the Maltese scheme is much lower than success rates elsewhere: “Given that Malta’s success rate is significantly lower (standing at 75% as indicated in the 2018 ORiip report), it is logical to consider that Malta’s checks and controls are stricter.” See “Sixth Annual Report on the Individual Investor Programme of the Government of Malta,” ORiip, 38.

However, it is unclear how many of the failures are the result of applicants withdrawing their applications and how many are the result of an application being rejected, as the “failure” rate includes all applications that were either rejected or withdrawn.

⁴⁷ Scherrer and Thirion, “Citizenship by Investment (CBI) and Residency by Investment (RBI) Schemes in the EU,” 18.

⁴⁸ “Investor Citizenship Schemes: European Commission Opens Infringements Against Cyprus and Malta for ‘Selling’ EU Citizenship,” European Commission, October 20, 2020, https://ec.europa.eu/commission/presscorner/detail/EN/IP_20_1925.

⁴⁹ “‘Golden Passport’ Schemes: Commission Proceeds With Infringement Case Against Malta,” European Commission, April 6, 2022, https://ec.europa.eu/commission/presscorner/detail/en/IP_22_2068.

⁵⁰ “Annual Report 2020,” National Development and Social Fund, 5. Article 13 of the Individual Investor Programme of the Republic of Malta Regulations establishes that there shall be a fund to be known as the National Development and Social Fund.

⁵¹ “Annual Report 2020,” National Development and Social Fund, 5.

⁵² “Annual Report 2020,” National Development and Social Fund, 7-8.

⁵³ “Media Release 01/2021—Monday 24 May 2021,” National Development and Social Fund, May 24, 2021, https://ndsf.com.mt/en/Pages/News/Media-Release-01-2021.aspx.

⁵⁴ “Annual Report 2020,” National Development and Social Fund, 8.

⁵⁵ “Annual Report 2020,” National Development and Social Fund, 8.

⁵⁶ “The Fund,” Norges Bank Investment Management, accessed July 12, 2023, https://www.nbim.no/; and “Who We Are,” GIC (blog), accessed July 12, 2023, https://www.gic.com.sg/who-we-are/.

⁵⁷ “Annual Report 2020,” National Development and Social Fund, 8.

⁵⁸ “Annual Report 2020,” National Development and Social Fund, 10, 11. This includes 6.5 percent in U.S. equities and 6.1 percent in emerging market equities.

⁵⁹ “Annual Report 2020,” National Development and Social Fund. 10.

⁶⁰ “Annual Report 2020,” National Development and Social Fund, 14.

⁶¹ “Annual Report 2020,” National Development and Social Fund, 15.

⁶² While the cash balance is high, it should be noted that the NDSF was used to support the Maltese economy and help provide social services during the pandemic. Referred to as a war-chest by Malta’s prime minister, the NDSF helped the Maltese government provide a guaranteed wage to some of its citizens in addition to other social services. “Malta Citizenship by Investment Fund,” ACC Immigration, December 7, 2021, https://www.maltaimmigration.eu/malta-citizenship-by-investment-fund/; “NDSF’s Targeted Funding for Social Projects Reaches €109.04M by December 2020,” Community Agency Malta, May 24, 2021, https://komunita.gov.mt/en/2021/05/24/ndsf-targeted-funding-for-social-projects-reaches-109m-by-december-2020/; and David Curmi, “The Importance of the National Development and Social Fund (NDSF),” National Development and Social Fund, accessed November 13, 2023, https://ndsf.com.mt/en/Documents/Interview-David-Curmi.pdf. The Chairman of the NDSF also noted that the fund’s large cash balance allowed it to support the Maltese government without having to liquidate its assets.

⁶³ “Annual Report 2020,” National Development and Social Fund, 5.

⁶⁴ “Sovereign Investors 2020: A Growing Force,” PwC, 2020, 3–6, https://www.pwc.com/gx/en/sovereign-wealth-investment-funds/publications/assets/sovereign-investors-2020.pdf.

⁶⁵ “Sovereign Investors 2020,” PwC.

⁶⁶ “Offshore Leaks Database,” International Consortium of Investigative Journalists, 2022, https://offshoreleaks.icij.org/; Julian Delia, “Four Years after Promised Divestment, Passports Fund Retains Majority Share of Lombard Bank,” February 9, 2022, https://theshiftnews.com/2022/02/09/four-years-after-promised-divestment-passports-fund-retains-majority-share-of-lombard-bank/; Lombard Bank Malta, “Lombard Bank Malta p.l.c.: Annual Report and Financial Statements,” 2022, https://www.lombardmalta.com/financial-report/2021/LOM_20211231_CON_AFR_529900UIRB65OY6U4B21/reports/lombardbankmaltaplc-2021-12-31-en-InlineViewer.xhtml; and Lombard Bank Malta, “2017 Annual Report,” 2018, https://www.lombardmalta.com/financial-results.

⁶⁷ “Offshore Leaks Database,” International Consortium of Investigative Journalists; Delia, “Four Years after Promised Divestment, Passports Fund Retains Majority Share of Lombard Bank.”

⁶⁸ Christian Henrik Nesheim, “Malta’s Budget Surplus Soars to Highest in EU, 90% Attributable to Citizenship by Investment,” Investment Migration Insider (blog), May 4, 2018, https://www.imidaily.com/editors-picks/maltas-budget-surplus-soars-to-highest-in-eu-90-attributable-to-citizenship-by-investment/.

⁶⁹ Scherrer and Thirion, “Citizenship by Investment (CBI) and Residency by Investment (RBI) Schemes in the EU,” 6. 

⁷⁰ Ranieri, “The Malta Connection: A Corrupting Island in a ‘Corrupting Sea’?”

⁷¹ Christian Henrik Nesheim, “Malta Sovereign Wealth Fund Now in World Top 50 Thanks to Citizenship Program,” Investment Migration Insider (blog), October 2, 2018, https://www.imidaily.com/europe/malta-sovereign-wealth-fund-now-in-world-top-50-thanks-to-citizenship-program/.

⁷² Nesheim, “Malta Sovereign Wealth Fund Now in World Top 50 Thanks to Citizenship Program.”

⁷³ “Top 100 Largest Sovereign Wealth Fund Rankings by Total Assets,” Sovereign Wealth Fund Institute, accessed September 05, 2023, https://www.swfinstitute.org/fund-rankings/sovereign-wealth-fund.

⁷⁴ Scherrer and Thirion, “Citizenship by Investment (CBI) and Residency by Investment (RBI) Schemes in the EU,” 45.

⁷⁵ Scherrer and Thirion, “Citizenship by Investment (CBI) and Residency by Investment (RBI) Schemes in the EU,” 45.

⁷⁶ Scherrer and Thirion, “Citizenship by Investment (CBI) and Residency by Investment (RBI) Schemes in the EU,” 45.

⁷⁷ “Malta Golden Passports,” BBC News.

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 are defense offset agreements. Defense offsets, sometimes referred to as “industrial participation” or “countertrade,” 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. In the United Arab Emirates (UAE), the details of these “sweetener” side deals—and sometimes even their existence—are secret. 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.

This chapter discusses defense offsets and their corruption risks, the role of the UAE’s sovereign wealth funds in offset projects, and the associated potential for rent-seeking behavior. This chapter does not allege any illegal activity by the Emirati government or Western defense firms. However, Transparency International has rated the UAE as especially susceptible to defense corruption. The UAE’s history of abuse of its sovereign wealth funds for money laundering (see chapter 3) and the secrecy surrounding many aspects of the Emirati defense sector create concerns that the Emirati defense procurement system could be at risk for abuse.

The UAE, Sovereign Wealth Funds, and Defense Offset Agreements

States use offset agreements to help make up for, or “offset,” some of the foreign currency leaving the country when arms or defense services are purchased from abroad. Offset agreements are divided into two types: direct and indirect. Direct offsets are directly linked to the specific defense goods in an agreement, such as requiring some of the components of a fighter aircraft to be made in the purchasing country.¹ Indirect offsets can be any side sweetener contracts agreed to as a condition for a defense contract, such as a deal for training associated with an aircraft purchase. And they do not need to have any links to the defense sector at all: as part of fulfilling offset obligations of selling arms to Saudi Arabia, defense firms Raytheon (U.S.) and Thales (France) financed a Saudi shrimp farm.² Consequently, indirect offset agreements are considered especially high-risk for patronage and corruption due to the secrecy surrounding them and the ability to funnel the contracts and subcontracts, and their associated funding, into any enterprise.

The UAE is unique in that two of its major sovereign wealth funds, the Mubadala Investment Company and the sovereign funds associated with the Tawazun Council (formerly known as the Tawazun Economic Council), were initially established to funnel proceeds from defense offsets to Emirati companies and citizens.³ Through a complex series of mergers and reorganizations, they remain intimately tied to the Emirati defense industry. Figure 1 displays a timeline of the development of key actors that comprise the nexus of their sovereign wealth funds and the arms trade; figure 2 demonstrates the relationships between the various actors.⁴

Mubadala, which is Arabic for “exchange,” was founded in 2002 as the Mubadala Development Company to diversify the UAE economy,⁵ but it originates with the UAE Offsets Group (UOG), which is sometimes cited as the Offsets Development Company. The UOG was founded by Amin Badr el-Din, a Jordanian who at the time was an adviser to then chief of staff of the UAE Armed Forces (now Emirati President) Sheikh Mohammed Bin Zayed Al Nahyan (commonly referred to by his initials MBZ). El-Din is credited with writing the UOG’s guidelines and elevating offsets as part of the UAE’s larger economic development plans.⁶ A 2022 filing with the U.S. Securities and Exchange Commission (SEC), regarding a company in which el-Din is a board member, states, “Between 1990–2000, Dr. Badr el-Din has been Chairman and Chief Executive to the UAE Offsets Group, also known as Mubadala, which he created in the early 1990s.” The SEC filing goes on to note that it was the UOG which established the “Mubadala sovereign fund.”⁷

Mubadala 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.⁸ The fund is a public joint stock company, with the Government of Abu Dhabi as its sole shareholder.⁹ Mubadala acts as a holding company for local start-ups and joint ventures, often with foreign firms as coinvestors. The fund also makes strategic investments in foreign firms, with the goal of moving some of their production to Abu Dhabi.¹⁰ Today, Mubadala’s portfolio is much larger than just defense offset–related financing and includes investments in sectors such as healthcare, pharmaceuticals, metals and mining, and real estate spanning over fifty countries.¹¹ It is nonetheless still used to help funnel Emirati defense offsets, such as a 2021 deal between a Swiss aircraft manufacturer, Pilatus, and the UAE company Strata. That deal was funneled through Mubadala to complete an offset deal for the UAE’s prior purchase of Swiss trainer aircraft.¹²

In 2017, the Mubadala Development Company absorbed another Emirati sovereign wealth fund, the International Petroleum Investment Company (IPIC). The merged funds are now called the Mubadala Investment Company.¹³ As described in chapter 3, IPIC—and especially its subsidiary Aabar Investments—had been embroiled in the infamous Malaysian 1MDB money laundering scandal in which Emiratis who ran IPIC helped Malaysian elites launder at least $4 billion from Malaysia’s 1MDB sovereign development fund.¹⁴ In 2018, Mubadala was merged again, this time with the Abu Dhabi Investment Council, bringing its assets to $284 billion¹⁵ and becoming the third-largest sovereign wealth fund in the UAE and the thirteenth-largest in the world.¹⁶

Another series of Emirati sovereign development funds within the UAE’s defense offset program are those under the control of the Tawazun Council (commonly referred to simply as Tawazun).¹⁷ It was established in 1992 as the investment arm of the UAE’s Offset Program Bureau until it was renamed in 2007 and again in 2022.¹⁸ Tawazun oversees the military component of the various defense offset agreements.¹⁹ Per its website regarding its core functions, “Tawazun Council is an independent government entity that works closely with the Ministry of Defense, Abu Dhabi Police and security agencies in the UAE”²⁰ To maintain a dialogue between the Tawazun Council and defense contractors, there is also a Foreign Defence Contractors Council, which consists of the representatives of the Tawazun Council, companies that supply the UAE Armed Forces, and any third parties they choose to invite.²¹

Mubadala and Tawazun co-owned a group that until 2019 was called the Emirates Defence Industries Company (EDIC); it was renamed EDGE Group in 2019 and absorbed into Mubadala. EDGE is now the UAE’s main state-owned defense industry conglomerate, with more than twenty-five companies.²² In addition to absorbing EDIC, Mubadala also absorbed Tawazun’s sovereign development fund, called Tawazun Holding, as well as another defense conglomerate called the Advanced Instruments Group.²³ (Confusingly, despite Tawazun Holding moving under the Mubadala SWF, the Tawazun Council remains distinct from Mubadala.)

When Tawazun Holding was moved under Mubadala in 2019, the Emirati government created a new $680 million sovereign fund under the control of the Tawazun Council called the Defense and Security Development Fund (now called the Strategic Development Fund).²⁴ This 2019 fund invests both domestically and internationally. For instance, it has signed agreements to set up a factory in the UAE for 3-D printing with an Australian firm²⁵ and has invested in Al Marakeb, an Emirati firm that develops and updates unmanned surface drones.²⁶ With a Singaporean partner, the fund has also invested in an Israeli satellite firm, hiSky Ltd.²⁷ The Strategic Development Fund has also partnered with three UAE state-owned banks to provide low-cost, low-collateral loans to Emirati small and medium sized enterprises in the security and defense sectors.²⁸

UAE’s Defense Offset Corruption Risks

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 of the purchasing country can direct offsets to their own companies or to underlings in return for loyalty.²⁹ 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, as described in box 1.³⁰

The large monetary value of these side contracts—plus their secrecy—has led to some breathtaking examples of corruption. For instance, a British law enforcement investigation of the Al Yamamah arms deal between the British government, British Aerospace (now called BAE Systems), and the Saudi government documented at least 6 billion British pounds ($12 billion at the time)³¹ in bribes going to the Saudi royal family through secret accounts, shell companies, and fraudulent invoices.³² Many of these kickbacks were part of the offsets associated with the deal. Likewise, the ongoing corruption trial against former South African president Jacob Zuma involves kickbacks from corrupt arms deals from 1999 to 2005 when he was deputy president.³³ Many of the bribes and preferential contracts to Zuma and his cronies were allegedly funneled through the associated offset contracts. The World Peace Foundation’s online Compendium of Arms Trade Corruption documents the use of offsets for corrupt purposes in at least eleven of the forty cases they assess,³⁴ thus raising red flags among anti-corruption and arms control advocates.

Global totals of offset contracts are hard to come by, but some aggregate figures and estimates suggest they are substantial. For the United States, in 2019 (the latest data available), indirect offsets made up 70 percent of obligations by American defense companies (and direct offsets made up the other 30 percent), with ten U.S. defense contractors signing thirty-one new offset agreements with eleven countries.³⁵ The total value of these offsets was $8.2 billion, or 62.5 percent of the value of the arms contracts signed that year. Lockheed Martin alone had $17.5 billion in offset agreements outstanding at the end of 2020, up from $12.1 billion in 2018.³⁶

The management consultancy Avascent estimates that the worldwide total value of defense offset contracts from 2021 to 2025 will be $371 billion, but only $229 billion will be fulfilled.³⁷ There is no means of estimating what percentage of these contracts may be diverted for patronage, overpriced for kickbacks, or paid for but never completed. However, even if it is a mere 10 percent of the expected value of all offset contracts over the next five years, then $37 billion could disappear from government treasuries—a staggering sum.

The aggregate numbers above are an undercount, as not all offset agreements are officially declared. In some cases, firms may camouflage offsets, for example by becoming major shareholders in local firms. Firms would not report such deals as official offsets, and a U.S. foreign military sales contract notification would claim that there were no known offsets associated with the arms agreement in question.³⁸

The UAE requires that any defense contract over $10 million must contain associated offsets worth at least 60 percent of the contract value.³⁹ That is, if a company were to fulfill a $10 million contract, it would also have to expend $6 million worth of direct or indirect offsets. Tawazun handles the offset contract negotiations and monitoring.⁴⁰ Companies have a variety of means of fulfilling their offset obligations, including investing in projects where at least one entity is a local partner; manufacturing products in the UAE and exporting them or providing the products to foreign buyers; taking part in technology transfer; establishing a company in the Abu Dhabi Global Market free zone; and offering internships and job placement for UAE nationals.⁴¹ Indirect offsets have been funneled into a wide array of investments, including luxury real estate; leasing programs for aircraft, oil tankers, agricultural and fish farming, shipbuilding, and waste management; and agreements for Western legal and financial firm services.⁴²

As scholar Shana Marshall has explained in her study of offsets in the UAE, Saudi Arabia, and Kuwait, “Official rationales have focused on increasing employment opportunities for Gulf nationals, attracting new technologies and foreign investment, and reducing the Gulf economies’ reliance on oil and gas exports through strategies of diversification.”⁴³ These are all worthy goals. She notes, however, that offsets have created few actual jobs, especially compared to the large burden that offsets place on state budgets, particularly since the cost of defense purchases increases to cover the cost of the offset deals. Moreover, because the countries making the purchases front much of the cost of offsets through tax credits and other investment incentives, these programs can be an especially inefficient means of generating job growth and facilitating technology transfer.⁴⁴

Marshall contends that “the primary area where offsets do have a discernable impact is on investment portfolios of influential domestic elites.”⁴⁵ She argues this is the real driving force behind these side deals. When examining a 2008 study by an Abu Dhabi–based investment bank, Marshall found that eight of the ten most powerful families in Abu Dhabi held significant shares and/or board seats on an average of 3.8 companies that had been established by, or received substantial investment from, an offset agreement. The families included that of UAE’s president, MBZ.⁴⁶ Such investments may legitimately advance the UAE’s goal of diversifying its economy away from oil, but they appear to be extensively linked to UAE’s elites.

The public and private sectors in the UAE—especially in strategic sectors like defense—have long been intertwined. As a foreign executive quoted in the Financial Times put it, “The line between royals and business [in Abu Dhabi] is getting blurred. I don’t think it exists now; it’s very hard to say what is the exclusive preserve of the private sector . . . I don’t think there are any credible private sector players in strategic sectors.”⁴⁷

Because so many of the deals are extremely complex, tracking the various flows of funds and potential conflicts of interest can be a challenge, even when the deals are publicized. For example, in 1997, an offset deal for Jordan involving Royal Jordanian airlines’ lease payments included the UAE government, thirty-seven banks, and four defense companies.⁴⁸ In another example, a 2007 deal called Project Alpha, facilitated by a defense offset broker called Blenheim Capital, involved fifteen defense companies that were pooling funds to provide financing for the main highway between Dubai and Abu Dhabi, plus the Al Raha Beach development, partnering with a then three-year-old company called Aldar Properties.⁴⁹ The project did indeed assist with the development of the UAE: today, Aldar is one of the largest developers in the UAE. At the time of the investment, the founder and chairman of Aldar, Ahmed Ali Al Sayegh, had also served on the board of the UAE Offsets Group (now called Tawazun) and since then has been a board member on many other firms funded with offset contracts.⁵⁰ He is also a founding board member of Mubadala.⁵¹ Mubadala was a founding stakeholder in Aldar and continues to hold a 25 percent stake in the company.⁵²

There are additional mechanisms for firms to keep an arm’s length from the actual offset contract. For instance, in the UAE, a defense company does not actually have to be a part of a joint venture to fulfill an offset obligation. Instead, it can encourage a third-party supplier to enter a joint venture. In addition, company “offset credits” can be applied not only to the contract at hand but also—if there are “leftover” credits—to other defense contracts it has been awarded, or they can even be traded to other firms who need offset credits to reach their requirements.⁵³

To help handle these complex exchanges, companies often use offset brokers. A few key firms stand out, such as Chescor Capital, which is incorporated in Mauritius, located in a Dubai free zone, and was started by Amin Badr El Din, the aforementioned founder of the UAE Offsets Group and Mubadala.⁵⁴ One of the most prolific offset brokers had been the aforementioned London-based Blenheim Capital (formerly called Summit Corporate Services), which was established by a former adviser to the UAE offsets program in the 1990s, R. Grant Rogan, and by the UAE Offsets Group. One oil industry journal noted at the time that it was the “brainchild” of el-Din and MBZ. Blenheim Capital was initially financed through offset funds provided by Lockheed Martin and funneled through Mubadala; it was recently dissolved after its founder declared bankruptcy.⁵⁵ Firms like Blenheim Capital handle the buying and selling of offset credits on behalf of defense companies, while allowing defense companies to keep an extra layer between themselves and whoever ultimately receives the offset funds. This especially concerns anti-corruption and arms control advocates. According to Transparency International’s Defense Companies Index, which measures the defense industry’s commitment to combating corruption, defense companies are less committed to combating corruption involving defense offsets than any other area of their corporate policies. Based on an analysis of 134 defense companies worldwide, 90 percent of surveyed companies exhibited “limited” to “very low” commitment to combatting corruption in this area.⁵⁶

In the UAE, there is an additional option for fulfilling offset contract obligations: cash. In 2016, Tawazun introduced an Accelerated Project Funding option for offsets. Contractors could invest cash into projects that were part of Tawazun. As an offset trade publication noted at the time, “the process would be transparent to overcome the challenges for US primes concerning cash payments and the Foreign Corrupt Practices Act.”⁵⁷ Details were scant because defense contractors who attended a meeting where the announcement was made were forced to sign nondisclosure agreements. The cash payments would be given a multiplier of six, meaning that if a company owed $6 million in offset commitments, paying $1 million in cash to the fund would yield the equivalent of the $6 million requirement.⁵⁸ More recent trade publications note that cash contributions now have a multiplier value of 2, the same multiplier that salaries of UAE nationals hired via offset agreements have.⁵⁹

The scheme received unwanted attention in 2017, when a series of leaked emails revealed the cash payment option.⁶⁰ (This arrangement violates the basic tenets of offset contracts, which are supposed to support the Emirati economy by bringing in new technologies or know-how or providing local employment.⁶¹) At the time, an arms industry expert, William Hartung, noted, “Offsets are a common practice in the global arms trade, and they are largely unregulated . . . I’m less familiar with the idea of using cash payments, which seem at best a form of legalized bribery.”⁶² Despite the publicity, cash contributions are still permitted per the UAE’s 2019 offset guidelines.⁶³

UAE Defense Sector Procurement Corruption Risks

According to Transparency International’s Government Defence Integrity Index (GDI), which assesses the comprehensiveness of anti-corruption measures in national defense institutions,⁶⁴ the UAE is considered a “very high risk” country for defense sector corruption. Procurement processes are opaque, underregulated, and lack public oversight—and are therefore highly susceptible to corrupt schemes.⁶⁵ 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.⁶⁶

Yet funneling defense offset contracts and associated financing through sovereign funds does not necessarily impede transparency and accountability if those funds are fully transparent and accountable. Indeed, Mubadala scored a 75 out of 100 in 2019 on the Peterson Institute’s sovereign wealth fund scorecard on transparency and accountability. (The average score was 66.) Mubadala also largely complies with the Santiago Principles for governing sovereign wealth funds.⁶⁷ Further, it received a score of 10 out of 10 on the Linaburg-Maduell Sovereign Wealth Fund Transparency Index (LMTI).⁶⁸

On the other hand, funds run by Tawazun have not been rated by the Peterson Institute or in the LMTI, nor is Tawazun a member of the International Forum of Sovereign Wealth Funds or a signatory to the Santiago Principles. The organization and administration of its funds and projects have also been excessively secretive. While Tawazun has publicly provided broad offset guidance, its treatment of specific policies has been described by contractors as “paranoid, secretive, and bizarre.”⁶⁹ For example, when new offset guidelines were sent out to contractors by the Emirati government in 2019, every page of the eighteen-page document was embossed with the following: “Highly Restricted. This information must not be shared in any circumstance with anyone other than its intended recipients.” The document also included other confidentiality warnings within the policy.⁷⁰

Both Mubadala and Tawazun are ultimately run by UAE’s president, most known by his initials MBZ.⁷¹ He has also personally been closely linked with defense offsets, having headed the UAE Offsets Group in the 1990s and early 2000s when he was chief of staff of the UAE Armed Forces.⁷²

Leadership between Mubadala and Tawazun and the entities that they control is fluid, which could lead to conflict-of-interest concerns. For instance, the current director of Tawazun, His Excellency Tareq Al Hosani, was formerly an associate director at Mubadala.⁷³ In addition to his duties at Tawazun, he sits on the boards of many companies funded by Mubadala and/or administered by Tawazun. For example, he is on the board of the International Golden Group (IGG), which was funded in part by Tawazun and in part by the Kaabi family,⁷⁴ while its chairman is former Armed Forces deputy chief of staff Major General Mohammad Helal Al Kaabi.⁷⁵ In September 2021, Tawazun increased its holdings of IGG by an undisclosed amount. The IGG provides “partnering services” for foreign defense companies and thus has numerous joint ventures with Tawazun-associated firms.⁷⁶ Al Hosani is also on the board of Al Yah Satellite Communication (Yahsat), where he was the executive director before taking up the Tawazun position.⁷⁷ Yahsat was 100 percent capitalized by Mubadala through offset partners Thales, Astrium, and European Aeronautic Defence and Space (EADS, a division of Airbus).⁷⁸ He also sits on the board of the EDGE Group, the consortium of companies run by Tawazun. This is not to suggest that these links have led to specific acts of corruption, undue influence, or other impropriety—only that there are potential risks associated with the linkages.

Some firms taking part in Emirati offset agreements have expressed concerns about the appearance of corruption. In 2012, for example, an offset trade magazine reported how firms were especially concerned at how Tawazun’s former chief executive officer, Saif Al Hajeri, was also the chief executive officer of Tawazun Holding (a predecessor to the current SDF). The director of Tawazun’s offset unit at the time, Matar Al Romaithi, justified this by stating, “[Saif Al Hajeri] is not getting anything personally. Tawazun Holding is our investment arm, which is part of the Tawazun Economic Council, and both of them are government entities. So where is the conflict of interest?”⁷⁹ He later stated, “We don’t want international companies to feel or to have a sense of doubt . . . The international firms we have consulted confirm we are not in breach of any conflict of interests or bribery acts.”⁸⁰

It Is Not Only the UAE: Global Defense Offset Risks

The UAE is not the only country that executes defense offset contracts through its sovereign wealth funds. Saudi Arabian Military Industries (the main partner for companies engaged in offset obligations there),⁸¹ the Helicopter Company, and other Saudi defense companies are wholly owned subsidiaries of the country’s Public Investment Fund (PIF),⁸² and civilian offsets are managed by the PIF.⁸³ PIF is one of the largest sovereign wealth funds globally, with over $600 billion in assets, and it seeks to have over $1 trillion in funds by the end of 2025, with about 30 percent of those being international investments (more details on PIF can be found in chapter 6).⁸⁴ Saudi Arabia’s General Authority for Military Industries, which is a subsidiary of the PIF and which is responsible for managing the country’s defense-related offset programs,⁸⁵ also recently signed a memorandum of understanding with Tawazun to facilitate cooperation between both groups, including joint ventures.⁸⁶ As with the UAE offset program, “cash donations” are also acceptable to fulfill offset obligations.⁸⁷

According to Transparency International’s GDI Index, Saudi Arabia is also at critical risk of defense corruption.⁸⁸ The Saudi defense sector has been embroiled in large-scale corruption scandals, including the aforementioned Al Yamamah deal. In March 2024, two middlemen employed by British company GPT Special Project Management Ltd (now part of EADS) were acquitted by a British court for bribing then head of the Saudi Arabian National Guard, Prince Miteb bin Abdullah (son of then Saudi King Abdullah), with millions of dollars between 2007 and 2010. A jury acquitted the middlemen after they successfully argued that their payments had been authorized by the Saudi and British governments.⁸⁹ And PIF, headed by Saudi Arabia’s Crown Prince Mohammed bin Salman, is currently involved in a civil dispute over $3.5 billion missing from a Saudi counterterrorism fund.⁹⁰

Bahrain has also developed an offsets program. The Bahrain Defense Forces recently signed a memorandum of understanding with Tawazun to “share expertise on offset programmes.”⁹¹ This memorandum came after Bahrain established a formal offset program for the first time in September 2020, which was reported to be almost identical to the UAE’s program.⁹² Per a November 2021 agreement, foreign suppliers with offset obligations in Bahrain can meet those requirements in the UAE and vice versa.⁹³ Bahrain’s sovereign wealth fund, Mumtalakat, has also recently signed a co-investment deal with Mubadala.⁹⁴ Per an offset trade publication regarding Bahrain’s offset guidelines,

The guidelines are almost entirely a replica of the policy published by the UAE. Large parts of the document are identical, with the words “Bahrain” and “BDF” (Bahrain Defence Force) replacing “UAE” and “Tawazun.” The quotas, multipliers, penalties, project categories and performance periods are also identical, although Bahrain sets a lower threshold.⁹⁵

Like Saudi Arabia and the UAE, Bahrain’s defense sector is considered to be at critical risk for susceptibility to defense-related corruption.⁹⁶ The royal family maintains absolute control over politics and the economy, controlling the country’s oil wealth, its security sector, and its sovereign wealth fund.⁹⁷

Ramifications and Recommendations

One area that requires additional study is the potentially significant ramifications for regional security. The lack of transparency into defense offset agreements makes such assessments exceedingly difficult, but the activities of some companies funded through the combination of offsets and sovereign wealth funds indicates a possible troubling nexus.

For example, Horizon Flight Training Academy was started in 2002 with funds from Mubadala and remains 100 percent owned by the fund as part of the new EDGE conglomerate. Its purpose is to train civilian and military pilots, trainers, and technicians.⁹⁸ The majority of its pilots go to the Emirati military, ⁹⁹ where they have flown in highly controversial military operations in Yemen.¹⁰⁰ One of the members of Horizon Flight Academy’s board is retired U.S. Army Lieutenant Colonel Stephen Toumajan, who appears to have commanded the UAE’s Joint Aviation Command (its combat helicopter wing). According to reports, Toumajan has officially been a contractor for Knowledge International, a U.S. sister company of Knowledge Point, another EDGE company.¹⁰¹ Though he has previously told the press that he is merely an adviser to the UAE, he has also identified himself as a “commanding general of the Joint Aviation Command of the UAE” and wore a uniform with insignia designating him as such in a U.S. Defense Department video from 2017.¹⁰² Toumajan has sat on the board of directors of other EDGE companies including Knowledge Point,¹⁰³ which demonstrates the close links between Mubadala, Tawazun, their associated companies, and Emirati military activities and oversight.

Moreover, the IGG has been identified in arms sale deals with signs of malfeasance. The former head of a Ukrainian arms firm told the Organized Crime and Corruption Reporting Project (OCCRP) in 2017 that Emirati firms, including IGG, sponsored arms shipments to places such as South Sudan. Documents provided to OCCRP from a Ukrainian arms firm included a “framework agreement” to ship $169 million worth in arms to South Sudan despite an EU arms embargo, with IGG acting as a broker.¹⁰⁴ In January 2024, IGG was added under the EDGE Group umbrella owned by Mubadala.¹⁰⁵

Given these allegations regarding UN sanctions violations and possible human rights violations associated with defense companies under the auspices of Mubadala and Tawazun, more insight into these funds and their associated offset contracts would help civil society, scholars, and the intelligence community better understand these entanglements.

Ideally, both the United States and the UAE would open up their offset-related arms procurement and export contracts to public scrutiny. At a minimum, the U.S. Congress should legislate changes to defense offset contracts that require public disclosure of summaries of these contracts, pricing details, and the beneficial owners of any associated contracts and subcontracts. The beneficial owners of offset agreements that are part of the U.S. Foreign Military Sales program could be made known under Section 885 of the Fiscal Year 2021 National Defense Authorization Act, which requires making beneficial ownership information for federal contracts available. This information could also be publicly posted through the Federal Awardee Performance and Integrity Information System,¹⁰⁶ as well as the more easily accessible USAspending database.¹⁰⁷ These steps would partially solve the problem, but they still would not enable the public disclosure of offsets associated with arms sales made through direct commercial sales between defense export companies and a government, nor would they cover military exports classified as “dual use” or those offsets that shirk the “offset” moniker. While there are substantial corruption concerns regarding the use of defense offset agreements globally, taking these steps would at least help ensure that the U.S. government is not complicit in corrupt offset-related activities abroad.

This compilation has documented how elites can use sovereign wealth funds for rent-seeking activity, including corruption. The combination of opaque defense procurement contracts intertwined with sovereign wealth funds in countries already considered highly susceptible to defense-related corruption should be of concern to governments, the defense sector, and civil society. Furthermore, the fact that potential corruption activities can have significant effects on peace and security only heightens the need for sovereign wealth funds to undergo much higher levels of scrutiny and associated government regulation by arms-exporting nations.

Notes

¹ Susan Rose-Ackerman and Bonnie J. Palifka, Corruption and Government: Causes, Consequences, and Reform (New York, NY: Cambridge University Press, 2016), 108; and Kevin Dehoff, John Dowdy, and O Sung Kwon, “Defense Offsets: From ‘Contractual Burden’ to Competitive Weapon,” McKinsey & Company, July 1, 2014, https://www.mckinsey.com/industries/public-sector/our-insights/defense-offsets-from-contractual-burden-to-competitive-weapon.

² The shrimp pools could not remain cool, and the project failed. A retired brigadier general who owned an 18 percent share of the Arabian Shrimp Company had been the head of Saudi Arabia’s Economic Offset Secretariat until he had retired from the military. He also had a 45 percent stake in the private venture firm that handled the offset obligation. “Guns and Sugar,” Economist, May 25, 2013, https://www.economist.com/business/2013/05/25/guns-and-sugar; and Shana Marshall, “The New Politics of Patronage: The Arms Trade and Clientelism in the Arab World,” University of Maryland College Park, 2012, 151, retrieved from https://www.proquest.com/dissertations-theses/new-politics-patronage-arms-trade-clientelism/docview/1179020359/se-2.

³ Marshall, “The New Politics of Patronage,” 169–170.

⁴ “UAE: OPB Turns Into TEC,” Countertrade and Offset, June 25, 2012. CTO archives available via paywall at https://www.cto-offset.com/archive-newsletter. See also Daniel Haberly, “From Financialization to Vulture Developmentalism: The South-North Strategic Sovereign Wealth Fund and Politics of the ‘Quadruple Bottom Line,’” in The Oxford Handbook of Sovereign Wealth Funds, eds. Douglas Cumming, Geoffrey Wood, Igor Filatotchev, and Juliane Reinecke (Oxford, UK: Oxford University Press, 2017); Agnes Helou, “UAE Launches ‘Edge’ Conglomerate to Address Its ‘Antiquated Military Industry,’” Defense News, November 6, 2019, https://www.defensenews.com/digital-show-dailies/dubai-air-show/2019/11/06/uae-launches-edge-conglomerate-to-address-its-antiquated-military-industry/; “About Us,” EDGE Group, accessed July 12, 2023, https://edgegroup.ae/about; “Our History,” Mubadala, accessed July 12, 2023, https://www.mubadala.com/en/who-we-are/our-history; and “Top 100 Largest Sovereign Wealth Fund Rankings by Total Assets,” Sovereign Wealth Fund Institute, accessed July 12, 2023, https://www.swfinstitute.org/fund-rankings/sovereign-wealth-fund, 100.

⁵ “Our History,” Mubadala, accessed July 29, 2023.

⁶ El-Din reportedly stepped down from UOG in 2000, which would predate Mubadala’s founding by two years. Marshall, “The New Politics of Patronage”; and “United Arab Emirates: The Cabinet—His Highness Sheikh Mohamed Bin Zayed Al Nahyan,” accessed December 8, 2023, https://uaecabinet.ae/en/details/federal-supreme-council/his-highness-sheikh-mohamed-bin-zayed-al-nahyan, 200–201. Most dates for the founding of the UOG merely point to its establishment in the 1990s, but one source states that it was founded in 1998 by the governments of Abu Dhabi and Dubai. Prior to 1997, each of the seven emirates that make up the UAE had to organize, train, and equip their own forces. In 1997, these forces were combined under one General Headquarters (GHQ). The UOG was created to serve as a combined organization to funnel defense offset–related investments into UAE-wide projects, whereas the Offsets Program Bureau (now Tawazun) was originally designated for offset investments just for the emirate of Abu Dhabi. “Abu Dhabi—UAE Offset Group,” The Free Library, 2014, accessed July 29, 2023, https://www.thefreelibrary.com/ABU+DHABI+-+UAE+Offset+Group.-a097785581.

⁷ US Security and Exchange Commission Form S-1 , “Makara Strategic Investment Corp.” February 25, 2022, accessed July 29, 2023, https://www.sec.gov/Archives/edgar/data/1871810/000110465922027517/tm2130459d2_s1.htm. Other sources that cite Mubadala’s development from the UAE’s offset program and its prior title as the Offset Development Company include Haberly, “From Financialization to Vulture Developmentalism,”101–103; and “Abu Dhabi Leading German Press Headlines,” Emirates New Agency, April 27, 2004, https://wam.ae/en/details/1395226435407. Another example comes from Stanley Carvalho, “New Firm to Control Dolphin,” Gulf News, March 20, 2003, https://gulfnews.com/uae/new-firm-to-control-dolphin-1.350783; which notes that the new “Offsets Development Co,” has replaced the “UAE Offsets Group” as the new equity holder with a 51 percent interest in Dolphin Energy Ltd. Subsequent reports note that it is Mubadala that has the 51 percent stake, such as Daniel Canty, “Special Report: Dolphin Energy: Mubadala, Total, and Oxy Have Turned Pipe Dreams Into Reality,” Oil & Gas Middle East, May 12, 2009, https://www.oilandgasmiddleeast.com/news/article-5444-special-report-dolphin-energy.

⁸ Haberly, “From Financialization to Vulture Developmentalism,” 101–103. Mubadala and the Tawazun are not the only funds set up to funnel defense offsets to UAE-based businesses. Others include Sinaat, a joint stock company established in 1999; a company called UAE Special Investments set up by Chase Manhattan Bank and Finasa Emirates in 1994; and the Alfia private equity fund managed by First Gulf Bank and incorporated in Mauritius in 2000. Little information is publicly available on these funds once they are established. Yawar Hanif Mian, “UAE Offset Programme: A Success Story,” Military Technology 23, no 3 (March 1999): 6015, accessed July 29, 2023, https://www.proquest.cm/docview/199055721/FA489EE4C984454FPQ/2?accountid=11091; “Chase Sets Up UAE Offset Investment Company,” Project and Trade Finance, issue 134 (September 1994), accessed July 29, 2023, https://www.proquest.com/docview/200636132?accountid=11091&forcedol=true; and Marshall, “The New Politics of Patronage,” 169–171.

⁹ James Chen, “Mubadala Development Company,” Investopedia, September 9, 2022, https://www.investopedia.com/terms/m/mubadala-development-company.asp.

¹⁰ Haberly, “From Financialization to Vulture Developmentalism,” 108.

¹¹ Andrew England, Simeon Kerr, and Samer al-Atrush, “The New Gulf Sovereign Wealth Fund Boom,” Financial Times, January 3, 2023, https://www.ft.com/content/33a985a5-6955-4f44-869f-82e82e620581.

¹² “Pilatus Gives Workshare to UAE’s Strata,” Countertrade and Offset XXXIX, no. 8, April 26, 2021, 4. CTO archives available via paywall at https://www.cto-offset.com/archive-newsletter.

¹³ Stanley Carvalho, “Abu Dhabi Creates $125 Billion Fund by Merging Mubadala, IPIC,” Reuters, January 21, 2017, https://www.reuters.com/article/us-emirates-abudhabi-funds-idUSKBN1550R2. If Mubadala was formed from IPIC in 2002 as described on Mubadala’s website, then the child sovereign wealth fund has acquired its original parent.

¹⁴ Carvalho, “Abu Dhabi Creates $125 Billion Fund by Merging Mubadala, IPIC”; James Griffiths, “How 1MDB Finally Caught Up With Najib Razak,” CNN, February 11, 2019, https://www.cnn.com/2019/02/10/asia/malaysia-najib-trial-1mdb-profile-intl/index.html; and England, Kerr, and al-Atrush, “The New Gulf Sovereign Wealth Fund Boom.”

¹⁵ England, Kerr, and al-Atrush, “The New Gulf Sovereign Wealth Fund Boom.”

¹⁶ “Our History,” Mubadala; “About Mubadala,” Mubadala, accessed July 12, 2022, https://www.mubadala.com/en/who-we-are/about-the-company; and “Top 100 Largest Sovereign Wealth Fund Rankings by Total Assets,” Sovereign Wealth Fund Institute.

¹⁷ Since 2019, the Defense and Security Development Fund has been managed under the Tawazun Economic Program, which in turn is run by Tawazun.

¹⁸ “UAE: OPB Turns Into TEC,” Countertrade and Offset; and “UAE: Tawazun Gains Muscle as New Investments are Readied,” Countertrade and Offset XXVI, no. 21, November 10, 2008, 6–7. CTO archives available via paywall at https://www.cto-offset.com/archive-newsletter.

¹⁹ Haberly, “From Financialization to Vulture Developmentalism,” 107. Tawazun is Arabic for “balance.” It was the U.S. Commerce Department’s International Trade Division that originally suggested establishing such funds in 1997. Soon after, however, the agency backed off, especially after members of Congress and some Commerce Department staff raised concerns that up-front offset payments could be used to channel financial favors to foreign officials. Daniel Pearl, “Offset Requirements of Defense Deals Often Have Little to Do With Purchaser,” Wall Street Journal, April 20, 2000, https://www.wsj.com/articles/SB956183692708157042.

²⁰ “Tawazun Council—Who We Are,” accessed December 8, 2023, https://www.tawazun.gov.ae/who-we-are/. The council members are the Tawazun Council CEO, the Chief Officer of the Industrial Development Unit, and the Senior Manager of Government Affairs. The Tawazun Council is also part of the Tawazun Economic Committee (TEC) which is “composed of six members who represent the GHQ [General Headquarters of the UAE Armed Forces], the Presidential Guard Command (PGC), and the Tawazun Economic Council. GHQ and PGC members include the Chief of Logistics Staff, Director of Purchasing Department, and Director of Contracts and Finance of PGC.” The Offset Guidelines Quarterly Bulletin, CTO, July 31, 2023, 318. CTO archives available via paywall at https://www.cto-offset.com/archive-qb. Though the UAE recently renamed the Tawazun Economic Council simply the “Tawazun Council,” trade publications still refer to it as the “Tawazun Economic Council,” including the source cited here.

²¹The Offset Guidelines Quarterly Bulletin, CTO, 318..

²² “Entities by Cluster,” EDGE Group, accessed July 28, 2023, https://edgegroup.ae/entities.

²³ Helou, “UAE Launches ‘Edge’ Conglomerate to Address Its ‘Antiquated Military Industry.’”

²⁴ “Abu Dhabi’s Tawazun Economic Council Launches $680m Defense Fund,” Arab News, February 14, 2019, https://www.arabnews.com/node/1451806/amp.

²⁵ “Titomic to Advance 3D Manufacturing Line With UAE-Based Tawazun SDF,” Australian Manufacturing (blog), February 26, 2021, https://www.australianmanufacturing.com.au/titomic-to-advance-3d-manufacturing-line-with-uae-based-tawazun-sdf/.

²⁶ “Defense and Security Development Fund Invests Into Al Marakeb in Return for 30%,” SDF (blog), February 19, 2019, https://www.sdf.ae/defense-and-security-development-fund-invests-into-al-marakeb-in-return-for-30/.

²⁷ The Singaporean firm is called ST Engineering. Its corporate venture capital unit that conducted the deal was itself originally formed from Singapore’s sovereign wealth fund, Temasek Holdings. “ST Engineering’s Corporate Venture Capital Unit Invests in HiSky,” Satellite Markets & Research, December 8, 2021, http://satellitemarkets.com/st-engineering-investment-hisky; “HiSky Raised $30M Series A Funding, Led by ST Engineering,” Strategic Development Fund, December 2021, https://www.sdf.ae/hisky-raised-30m-series-a-funding-led-by-st-engineering/; and Kristie Neo, “ST Engineering Ventures Eyes China Market, Plans Presence in US, Israel,” DealStreetAsia (blog), October 25, 2018, https://www.dealstreetasia.com/stories/st-engineering-ventures-109670/.

²⁸ The three banks are First Abu Dhabi Bank, Commercial Bank of Dubai, and National Bank of Fujairah. Deena Kamel, “Tawazun’s Defence Fund Partners With Local Banks on Dh700m Programme,” National, November 13, 2019, https://www.thenationalnews.com/business/banking/tawazun-s-defence-fund-partners-with-local-banks-on-dh700m-programme-1.937276.

²⁹ Dehoff, Dowdy, and Kwon, “Defense Offsets.”

³⁰ It is not only states that demand these agreements be shielded from public view; defense firms often argue that offsets should be classified as “proprietary” information to prevent disclosure. See box for additional information on U.S. laws and regulations regarding defense offsets. For references in box 1, see Colby Goodman, “Holes in the Net: US Arms Export Control Gaps in Combatting Corruption,” Transparency International Defence and Security Program, January 2020, https://ti-defence.org/publications/united-states-arms-export-sales-corruption-fraud-risk/; “Guns and Sugar” Economist; “Defense Production Act Amendments of 1992,” Public Law 102–558, October 28, 1992, https://www.govinfo.gov/content/pkg/STATUTE-106/pdf/STATUTE-106-Pg4198.pdf#page=1; “Military Exports: Concerns Over Offsets Generated With US Foreign Military Financing Funds,” Government Accountability Office, June 1994, https://www.gao.gov/assets/nsiad-94-127.pdf; “Foreign Military Sales Case Development,” Defense Security Cooperation Agency, accessed July 12, 2023, https://samm.dsca.mil/chapter/chapter-5#C5.4; and The Offset Guidelines Quarterly Bulletin, CTO, July 31, 2023, 341. CTO archives available via paywall at https://www.cto-offset.com/archive-qb/.

³¹ The estimated dollar value based on a British pound/U.S. dollar exchange rate of 1.98 as of December 1, 2006. The SFO investigation was shut down by the UK government in December 2006 as allegations of these immense bribes continued to emerge. Exchange rate for 2006 accessed from https://www.poundsterlinglive.com/bank-of-england-spot/historical-spot-exchange-rates/gbp/GBP-to-USD-2006.

³² “The Al Yamamah Arms Deals,” World Peace Foundation, accessed July 12, 2023, https://sites.tufts.edu/corruptarmsdeals/the-al-yamamah-arms-deals/.

³³ “The South African Arms Deal,” World Peace Foundation, accessed July 12, 2023, https://sites.tufts.edu/corruptarmsdeals/the-south-african-arms-deal/; Mogomotsi Magome, “South African Court Rules Zuma’s Corruption Case to Continue,” AP News, October 26, 2021, https://apnews.com/article/africa-money-laundering-south-africa-jacob-zuma-87b8accb7f37accbe168ff8104c4bbcf; and Mogomotsi Magome and Gerald Imray, “Former South African President’s Trial Over Arms Deal Begins,” Defense News, May 26, 2021, https://www.defensenews.com/global/mideast-africa/2021/05/26/former-south-african-presidents-trial-over-arms-deal-begins/.

³⁴ Goodman, “Holes in the Net,” 10.

³⁵ “Annual BIS Offset Report: Total Volume of Offsets Higher Than Average Despite Lowest Number of Offset Contracts and Transactions,” Countertrade and Offset, August 16, 2021. CTO archives available via paywall at https://www.cto-offset.com/archive-newsletter. American defense companies must annually report any offset contract agreements that exceed $5 million, as well as the performance of any offset obligations worth over $250,000 in credits. The Commerce Department only publishes aggregated data; no individual company data can be released without the permission of the company. “Reporting for Calendar Year 2020 on Offsets Agreements Related to Sales of Defense Articles or Defense Services to Foreign Countries or Foreign Firms,” U.S. Federal Register 86, no. 100 (2021): 28335–6, https://www.govinfo.gov/content/pkg/FR-2021-05-26/pdf/2021-11068.pdf.

³⁶ “Lockheed Adds $2.4 Billion of Outstanding Offsets in 2020, Drops $100m in Penalty Liabilities,” Countertrade and Offset, March 22, 2021. CTO archives available via paywall at https://www.cto-offset.com/archive-newsletter.

³⁷ “Defense Offsets Expectations Are Considerable, But Implementation Is Uneven,” Avascent (blog), February 23, 2021, https://www.avascent.com/news-insights/perspectives/defense-offsets-expectations-are-considerable-but-implementation-is-uneven.

³⁸ Marshall, “The New Politics of Patronage,” 154.

³⁹The Offset Guidelines Quarterly Bulletin, CTO, July 31, 2023, 323. CTO archives available via paywall at https://www.cto-offset.com/archive-qb.

⁴⁰ Bilal Y. Saab, “The Gulf Rising: Defense Industrialization in Saudi Arabia and the UAE,” May 7, 2014, 28, www.atlanticcouncil.org/images/publications/The_Gulf_Rising.pdf. An offset agreement is known as a Tawazun Economic Programme Agreement (TEPA). The Offset Guidelines Quarterly Bulletin, CTO, July 31, 2023, 323. CTO archives available via paywall at https://www.cto-offset.com/archive-qb.

⁴¹The Offset Guidelines Quarterly Bulletin, CTO, July 31, 2023, 320-322. CTO archives available via paywall at https://www.cto-offset.com/archive-qb.

⁴² Marshall, “The New Politics of Patronage,” 167.

⁴³ Marshall, “The New Politics of Patronage,” 149.

⁴⁴ Marshall, “The New Politics of Patronage,” 211–17, 224–29.

⁴⁵ Marshall, “The New Politics of Patronage,” 148.

⁴⁶ Marshall, “The New Politics of Patronage,” 168.

⁴⁷ Andrew England and Simeon Kerr, “The Abu Dhabi Royal at the Nexus of UAE Business and National Security,” Financial Times, January 25, 2021, https://www.ft.com/content/ce09911b-041d-4651-9bbb-d2a16d39ede7.

⁴⁸ Carola Hoyas, “Quid Pro Quos Mean Defence Contracts Help Gulf Economies,” Financial Times, October 9, 2013, https://www.ft.com/content/2e332690-25f1-11e3-8ef6-00144feab7de.

⁴⁹ Hoyas, “Quid Pro Quos Mean Defence Contracts Help Gulf Economies.”

⁵⁰ Shireena Al Nowais, “President Sheikh Khalifa Appoints New Minister of State,” National, September 18, 2018, https://www.thenationalnews.com/uae/president-sheikh-khalifa-appoints-new-minister-of-state-1.768327.

⁵¹ In July 2022, Mubadala announced that Aldar was buying $1.17 billion worth of properties from Mubadala. “Minister of State His Excellency Ahmed Bin Ali Al Sayegh,” United Arab Emirates Ministry of Foreign Affairs & International Cooperation, accessed August 13, 2022, https://www.mofaic.gov.ae/the-ministry/the-ministers/minister-of-state-and-chairman-of-abu-dhabi-global-market/minister-of-state-and--chairman-of-abu-dhabi-global-market; and Massoud A. Derhally and Sarmad Khan, “Aldar Agrees to Buy Four Properties From Mubadala in $1.17bn Deal,” National, July 28, 2022, https://www.thenationalnews.com/business/2022/07/28/aldar-agrees-to-buy-4-properties-from-mubadala-in-117bn-deal/.

⁵² Derhally and Khan, “Aldar Agrees to Buy Four Properties From Mubadala in $1.17bn Deal.”

⁵³ Leo G.B. Welt and Dennis B. Wilson, “Offsets in the Middle East,” Middle East Policy Council, accessed November 1, 2023, https://www.mepc.org/journal/offsets-middle-east; and “UAE: Tawazun’s Policy Is Off the Record—And That’s Official,” Countertrade and Offset, March 18, 2019, 2–3. The Offset Guidelines Quarterly Bulletin, Countertrade and Offset, July 31, 2023, 320–322. Excess credits can be banked for up to five years following the completion of the offset project. The Offset Guidelines Quarterly Bulletin, Countertrade and Offset, July 31, 2023, 327. CTO archives available via paywall at https://www.cto-offset.com/archive-qb.

⁵⁴ Marshall, “The New Politics of Patronage,” 200–201; and “Chescor Capital I Corporate Finance & Strategy I Dubai,” Chescor Capital, accessed January 30, 2022, https://www.chescorcapital.com.

⁵⁵ Blenheim was also heavily involved in aircraft leasing, which is another common use for offset funds. Marshall, “The New Politics of Patronage,” 201–204; “Blenheim Capital Services Limited,” UK Companies House, accessed July 12, 2023, https://find-and-update.company-information.service.gov.uk/company/05819287/officers; and Anne Rhodes, “UAE Offsets Move Westward With Refining and Marketing Megaproject,” Oil & Gas Journal 98, no. 36 (September 4, 2000): accessed July 29, 2023, https://www.proquest.com/docview/274441469/C62E1617E5D642AAPQ/1?accountid=11091. Blenheim declared bankruptcy in 2021 after a public and expensive divorce by R. Grant Rogan and a feud with Lockheed Martin over offset contracts with South Korea.

⁵⁶ Transparency International, “Defence Companies Index 2020 on Anti-Corruption and Corporate Transparency,” Transparency International Defence and Security Program, accessed July, 28, 2021, https://ti-defence.org/dci/.

⁵⁷ “UAE: Tawazun Introduces Temporary ‘Get Out of Trouble’ Option,” Countertrade and Offset, November 7, 2016, 6. CTO zrchives available via paywall at https://www.cto-offset.com/archive-newsletter.

⁵⁸ “UAE: Tawazun Introduces Temporary ‘Get Out of Trouble’ Option,” Countertrade and Offset, 5–6.

⁵⁹The Offset Guidelines Quarterly Bulletin, CTO, July 31, 2023, 326. CTO archives available via paywall at https://www.cto-offset.com/archive-qb.

⁶⁰ Ryan Grim, “Gulf Government Gave Secret $20 Million Gift to D.C. Think Tank,” The Intercept (blog), August 10, 2017, https://theintercept.com/2017/08/09/gulf-government-gave-secret-20-million-gift-to-d-c-think-tank/.

⁶¹ If, for instance, a company were to win an arms contract worth $10 million, then presumably, a $6 million offset would be owed with it. That $6 million should be put into creating a local parts supplier, for instance, which increases the country’s industrial base and provides jobs. If, however, cash is provided instead, it would have made much more sense to simply charge $4 million for the defense contract rather than charge $10 million to the country’s treasury but then divert $6 million of that to an off-budget fund.

⁶² Alex Emmons, “Weapons Money Intended for Economic Development Being Secretly Diverted to Lobbying,” The Intercept (blog), August 17, 2017, https://theintercept.com/2017/08/17/weapons-money-intended-for-economic-development-being-secretly-diverted-to-lobbying/.

⁶³ “UAE: Tawazun’s Policy Is Off the Record,” Countertrade and Offset, 2. CTO archives available via paywall at https://www.cto-offset.com/archive-newsletter.

⁶⁴ The Government Defense Integrity Index (GDI) is the only global assessment tool for countries’ security sector susceptibility to corruption. As the European Commission noted about the index, “It [the GDI] is thus a comprehensive assessment of the quality of institutional controls in the defence sector.” See “Government Defence Integrity Index,” European Commission, accessed April 19, 2024, https://composite-indicators.jrc.ec.europa.eu/explorer/explorer/indices/gdii/government-defence-integrity-index.

⁶⁵ Transparency International, “Government Defence Integrity Index 2020—United Arab Emirates,” Transparency International Defence and Security Program, accessed July, 28, 2021, https://ti-defence.org/gdi/countries/united-arab-emirates/.

⁶⁶ Transparency International, “Government Defence Integrity Index 2020—United Arab Emirates.”

⁶⁷ 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.

⁶⁸ “Linaburg-Maduell Transparency Index,” accessed July 12, 2023, https://www.swfinstitute.org/research/linaburg-maduell-transparency-index.

⁶⁹ “UAE: Tawazun’s Policy Is Off the Record,” Countertrade and Offset.

⁷⁰ “UAE: Tawazun’s Policy Is Off the Record,” Countertrade and Offset, 1.

⁷¹ Artur Grigoryan, “The Ruling Bargain: Sovereign Wealth Funds in Elite-Dominated Societies,” Economics of Governance 17, no. 2 (May 2016): 169–170, https://doi.org/10.1007/s10101-015-0168-7; and “ Sheikh Mohamed Bin Zayed Al Nahyan Issues Resolutions Appointing Tawazun to Manage Procurements, Contracts of UAE Armed Forces, Abu Dhabi Police,” Zawya, press release, February 24, 2021, https://www.zawya.com/en/press-release/sheikh-mohamed-bin-zayed-al-nahyan-issues-resolution-appointing-tawazun-to-manage-procurements-contracts-of-no72gg8d.

⁷² Kristian Coates Ulrichsen, The United Arab Emirates: Power, Politics, and Policymaking (New York, NY: Routledge, 2017), 145.

⁷³ “HE Tareq Al Hosani—Al Yah Satellite Communications Company,” Yahsat, accessed July 13, 2023, https://www.yahsat.com/en/about-yahsat/our-leadership/board-of-directors/he-tareq-abdulraheem-al-hosani.

⁷⁴ Marshall, “The New Politics of Patronaged,” 422; and “HE Tareq Al Hosani—Al Yah Satellite Communications Company,” Yahsat.

⁷⁵ Marshall, “The New Politics of Patronage,” 169.

⁷⁶ Charles Forrester, “Tawazun Boosts Investments After Reshuffling Businesses,” Janes, September 23, 2021, https://www.janes.com/defence-news/news-detail/tawazun-boosts-investments-after-reshuffling-businesses.

⁷⁷ “HE Tareq Al Hosani—Al Yah Satellite Communications Company,” Yahsat.

⁷⁸ Marshall, “The New Politics of Patronage,” 427.

⁷⁹ “UAE: Duel in the Sun as Passions Boil Over,” Countertrade and Offset, August 27, 2012. CTO archives available via paywall at https://www.cto-offset.com/archive-newsletter.

⁸⁰ “UAE: Duel in the Sun as Passions Boil Over,” Countertrade and Offset.

⁸¹ The CEO of Saudi Arabian Military Industries is the former defense contractor Rheinmetall CEO. The Offset Guidelines Quarterly Bulletin, CTO, July 31, 2023, 233. CTO archives available via paywall at https://www.cto-offset.com/archive-qb.

⁸² “Airbus to Form Joint Venture With SAMI as It Pushes for Jet Order,” Countertrade and Offset, December 20, 2021. CTO archives available via paywall at https://www.cto-offset.com/archive-newsletter.

⁸³The Offset Guidelines Quarterly Bulletin, CTO, July 31, 2023, 233. CTO archives available via paywall at https://www.cto-offset.com/archive-qb.

⁸⁴ Hadeel Al Sayegh and Moataz Mohamed, “Saudi Arabia Transfers Aramco Shares Worth $80 Bln to State Fund,” Reuters, February 13, 2022, https://www.reuters.com/business/saudi-arabia-transfers-4-aramco-shares-sovereign-wealth-fund-state-news-agency-2022-02-13/; England, Kerr, and al-Atrush, “The New Gulf Sovereign Wealth Fund Boom.”

⁸⁵ The board of the General Authority for Military Industries (GAMI) is headed by Crown Prince Mohammad bin Salman; other members include the Minister of Energy, Industry, and Mineral Resources; Minister of Finance; Minister of Commerce and Industry; Chairman of the Board of SAMI; and representatives from the ministries of defense and interior plus the national guard. The Offset Guidelines Quarterly Bulletin, Countertrade and Offset, July 31, 2023, 233. CTO archives available via paywall at https://www.cto-offset.com/archive-qb. Offset proposals from defense contracts may be submitted to GAMI before they develop a full offset plan; among the information contained in a project proposal is information on the chosen local partner or subcontractor. A trade publication notes, “Selecting a partner [a local Saudi partner to an offset agreement] connected to the royal family, perhaps through a young person close to Prince Salman, could liberate the OEM [original equipment manufacturers] from offset requirements and focus instead on localization.” The Offset Guidelines Quarterly Bulletin, Countertrade and Offset, July 31, 2023, 236–237. CTO archives available via paywall at https://www.cto-offset.com/archive-qb.

⁸⁶ “GAMI and Tawazun Sign Cooperation Agreement,” Countertrade and Offset, March 8, 2021. CTO archives available via paywall at https://www.cto-offset.com/archive-newsletter.

⁸⁷The Offset Guidelines Quarterly Bulletin, Countertrade and Offset, July 31, 2023, 239. CTO archives available via paywall at https://www.cto-offset.com/archive-qb.

⁸⁸ “Saudi Arabia,” Transparency International Government Defence Integrity Index, September 2019, accessed July 29, 2023, https://ti-defence.org/gdi/countries/saudi-arabia/.

⁸⁹ This trial has been especially sensitive in the United Kingdom because the defendants claimed that GPT was merely a “middleman” to facilitate the payment of bribes (to Saudi senior leaders and royals) that were arranged as part of a UK-Saudi arms deal that had been agreed to in 1978. Oliver Briggs, “GPT Pleads Guilty to Corruption,” UK Serious Fraud Office, April 28, 2021, https://www.sfo.gov.uk/2021/04/28/gpt-pleads-guilty-to-corruption/; “GPT and the Saudi National Guard,” World Peace Foundation, accessed August 13, 2022, https://sites.tufts.edu/corruptarmsdeals/gpt-and-the-saudi-national-guard/; “Court Halts Case Into UK Bribery to Secure Saudi Arms Deal,” Middle East Monitor (blog), July 15, 2022, https://www.middleeastmonitor.com/20220715-court-halts-case-into-uk-bribery-to-secure-saudi-arms-deal; and David Pegg and Rob Evans, “Two Men Acquitted of Bribing Saudis in Huge British Defence Deal,” Guardian, March 6, 2024, https://www.theguardian.com/uk-news/2024/mar/06/two-men-acquitted-of-bribing-saudis-in-huge-british-defence-deal.

⁹⁰ Andrew England and Simeon Kerr, “Saudi Arabia: $3.5bn Fraud Case Set to Define Crown Prince’s Anti-Graft Campaign,” Financial Times, March 28, 2021, https://www.ft.com/content/df95eab7-5dce-48fc-943d-889efe74fd6b.

⁹¹ “Tawazun and Bahrain Strengthen Offset Cooperation,” Countertrade and Offset, December 6, 2021. CTO archives available via paywall at https://www.cto-offset.com/archive-newsletter.

⁹² “Tawazun and Bahrain Strengthen Offset Cooperation,” Countertrade and Offset, 6.

⁹³The Offset Guidelines Quarterly Bulletin, Countertrade and Offset, July 31, 2023, 41. CTO archives available via paywall at https://www.cto-offset.com/archive-qb.

⁹⁴ Fareed Rahman, “Mubadala and Bahrain’s Mumtalakat Sign Deal to Explore Co-Investment Opportunities,” National, December 14, 2021, https://www.thenationalnews.com/business/economy/2021/12/14/mubadala-and-bahrains-mumtalakat-sign-deal-to-explore-co-investment-opportunities/.

⁹⁵The Offset Guidelines Quarterly Bulletin, Countertrade and Offset, July 31, 2023, 39. CTO archives available via paywall at https://www.cto-offset.com/archive-qb.

⁹⁶ “Bahrain,” Transparency International Government Defence Integrity Index, October 2020, https://ti-defence.org/gdi/countries/bahrain/.

⁹⁷ For more on Bahrain’s defense sector, see Jodi Vittori, “Bahrain’s Fragility and Security Sector Procurement,” Carnegie Endowment for International Peace, February 26, 2019, https://carnegieendowment.org/2019/02/26/bahrain-s-fragility-and-security-sector-procurement-pub-78443.

⁹⁸ “Mubadala Shares Plans: Establishing Strong Aerospace Industry in Abu Dhabi,” November 10, 2007, https://www.mubadala.com/en/news/mubadala-shares-plans-establishing-strong-aerospace-industry-abu-dhabi. Some Mubadala press releases are no longer available on their website. The author is grateful to a researcher in the UAE who shared downloads of the original press releases.

⁹⁹ Peter Shaw-Smith, “Horizon Flight Academy Vital to Mideast Rotorcraft Training,” Aviation International News, January 23, 2020, https://www.ainonline.com/aviation-news/general-aviation/2020-01-23/horizon-flight-academy-vital-mideast-rotorcraft-training. At least one member of the Board of Horizon Flight Academy is also a senior military leader: His Excellency Major General Staff Pilot Stephen A. Toumajan.

¹⁰⁰ “Statement of Armed Forces Official Source on Refugee Boat Incident,” Emirates News Agency, March 20, 2017, http://wam.ae/en/details/1395302603973.

¹⁰¹ Quoted from Michael Picard and Colby Goodman, “Hidden Costs: US Private Military and Security Companies and the Risks of Corruption and Conflict,” Transparency International Defence and Security, July 2022, 18-20, available at https://ti-defence.org/wp-content/uploads/2022/08/Hidden-Costs-US-Private-Military-and-Security-Companies-and-the-Risks-of-Corruption-and-Conflict-Web-PDF.pdf.

¹⁰² Quoted from Picard and Goodman, “Hidden Costs.” Per an Emirati government website, “Toumajan was the former Commander and Senior Aviation Advisor for the Joint Aviation Command (JAC). Specifically responsible for the combat readiness and execution of all aviation missions and training for UAE forces and numerous Foreign Military Sales (FMS) and Direct Commercial Sales (DCS) aviation programs.” A few paragraphs later, the same website states, “He [Toumajan] has been a member of the several [sic] Board of Directors including Knowledge Point International and Horizon Flight Academy International and Board of Directors for Horizon flight Academy and AMMROC Maintenance Company.” More information on his role in the UAE can be found at Aram Roston, “This American Is a General for a Foreign Army Accused of War Crimes in Yemen,” BuzzFeed News, May 7, 2018, https://www.buzzfeednews.com/article/aramroston/stephen-toumajan-general-us-uae-yemen-contractor; Craig Whitlock and Nate Jones, “UAE Relied on Expertise of Retired U.S. Troops to Beef Up Its Military,” Washington Post, accessed July 12, 2023, https://www.washingtonpost.com/investigations/interactive/2022/uae-military-us-veterans/.

¹⁰³ In 2021, Knowledge Point was placed under the company Jaheziya, another EDGE Group company that specializes in firefighting and emergency response. See “Edge Consolidates Training Businesses,” Janes, October 27, 2021, available at https://www.janes.com/defence-news/news-detail/edge-consolidates-training-businesses; and Picard and Colby, “Hidden Costs.”

¹⁰⁴ “Documents Show Arms Network Skirted EU Embargoes,” Organized Crime and Corruption Reporting Project, October 2, 2017, https://www.occrp.org/en/investigations/7070-documents-show-arms-network-skirted-eu-embargoes; “From London to Juba: A UK-Registered Company’s Role in One of the Largest Arms Deals to South Sudan,” Amnesty International, 2017, https://www.amnesty.org/en/wp-content/uploads/2021/05/ACT3071152017ENGLISH.pdf.

¹⁰⁵ “EDGE Expands End-to-End Defence Capabilities With Addition of International Golden Group,” Aletihad, January 23, 2024, https://en.aletihad.ae/news/business/4458457/edge-group-adds-international-golden-group-to-portfolio-of-c.

¹⁰⁶ Neil Gordon, “The U.S. Just Created a Public Beneficial Ownership Registry for a Subset of Companies,” Project On Government Oversight, March 4, 2021, https://www.pogo.org/analysis/2021/03/the-u-s-just-created-a-public-beneficial-ownership-registry-for-a-subset-of-companies/.

¹⁰⁷ “Government Spending Open Data,” USAspending, accessed July 12, 2023, https://www.usaspending.gov/.

When used appropriately, sovereign wealth funds (SWFs) can help address budget deficits by using natural resource revenues, help save resources for future generations, or serve as a bulwark against natural resource–associated long-term economic harms, better known as “Dutch disease.”¹ Yet as the preceding chapters of this compilation have demonstrated, SWFs can sometimes severely “undermine public financial management and become sources of patronage and nepotism.”² Essentially, within the universe of SWFs, there is a significant governance gap, which has created the opportunity for systemic corruption and associated issues to take hold. Instances of corruption can be traced to a variety of institutional and environmental factors, including

• absence of clear definitions for SWFs;
• corruption-rich environments or those with weak rule of law;
• weak or absent independent oversight of SWFs;
• ever-changing objectives and mandates of SWFs;
• poorly defined withdrawal, deposit, and investment rules;
• conflicts of interest between private sector intermediaries and SWFs; and
• absence of mandated financial reporting and financial transparency obligations.

The problem at the heart of this compilation is that without adequate protections it is easy for SWFs to operate in a potential “sea of corruption” instead of operating as “islands of good governance.” Therefore, a path toward improved governance must focus not only on strengthening how SWFs operate institutionally but also on reforming the international environment of norms that affect SWFs and the array of actors that interact with and benefit from SWF activity. This chapter sets out recommendations to achieve such reform, focusing on the reform in three areas:

1. countries where SWFs invest and private sector intermediaries that interact with SWFs;
2. countries where SWFs are created (particularly reforms related to how these SWFs should implement well-defined governance and operational norms); and
3. international standards for SWFs.

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

As outlined in the first chapter, SWF investment is inexorably tied to the larger international regulatory debate on foreign direct investment (FDI) and the protection of national security. This debate has birthed laws at the national level that scrutinize SWF investment for national security intrusions.

The United States, as both the world’s top foreign investor and the top recipient of foreign investment, presents an example case of how reforms targeting SWFs have developed. The United States has traditionally championed open investment environments,³ which has greatly benefited its economy. A report from the U.S. Department of Commerce found that 10 percent of U.S. employment (16 million jobs) were attributable to foreign investment in 2019.⁴

At the same time, the United States and other countries that have traditionally welcomed foreign investment are worried about SWF investment undermining their security. The concerns around security and foreign investments have always been closely linked to the challenges stemming from ongoing global geopolitics at the time of investment. For instance, in the late 1980s, the Japanese government attempted to acquire a U.S. semiconductor company, which led to the passage of the Exon-Florio amendment to the Defense Production Act.⁵ The amendment gave the president the power to block any potential foreign investments or to divest foreign investments from U.S. companies if they constituted a threat to U.S. national security.⁶ The Japanese government’s attempted acquisition in fact came at a time when U.S.-Japan relations were tense amid a trade war and U.S. concerns about how the rise of Japan as a global super power could threaten U.S. economic interests.⁷ Fast forward to today, and there are similar but perhaps even more pressing concerns around potential Chinese government investments in sensitive U.S. technology sectors (see figure 1). These concerns resulted in the passage of the Foreign Investment Risk Review Modernization Act of 2018 and the 2022 Executive Order on Ensuring Robust Consideration of Evolving National Security Risks by the Committee on Foreign Investment in the United States (CFIUS).⁸ The 2022 executive order represented the first time that a U.S. president “expressly directed CFIUS to prioritize certain national security risks when reviewing covered transactions.”⁹

With SWFs, national security risks are only magnified due to the size of the assets at their disposal, their investment strategies, and the assumptions that because they are “of” the government their actions are intertwined with the country’s foreign policy objectives. These concerns and risks have been at the heart of a debate on how to protect a country’s national security while also fostering an open investment environment. In 2006–2007, when security concerns among countries of the Organisation of Economic Co-operation and Development peaked, more than a dozen countries representing more than 40 percent of inward FDI adopted or debated new laws to scrutinize SWF- or foreign government–linked FDI.¹⁰ In broad terms, these laws and other FDI laws primarily seek to target three kinds of national security threats.

1. One threat is the denial or manipulation of access that would make a country dependent on a foreign supplier. An example is the 1990 attempted acquisition of U.S.-based Semi-Gas Systems by a Japanese company, Nippon Sanso Holdings.¹¹ The acquisition would have raised the Japanese company’s global market share to 40 percent.
2. A second threat is the leak of sensitive technology or know-how. An example is the 1992 attempted acquisition of a U.S. missile company, Ling-Temco-Vought, by a French company, Thomson-CSF (now called Thales).¹² The successful acquisition would have provided the French company (and therefore potentially the French government) with access to critical U.S. technology.
3. A third threat is infiltration, espionage, and disruption. An example is the 2005 attempted acquisition by Dubai Ports World of a company that owned or leased terminal facilities in U.S. ports in Baltimore, Houston, Miami, New Orleans, Newark, and Philadelphia. The acquisition would have provided the United Arab Emirates a mechanism for “clandestine observation or disruption.”¹³

National Laws and SWF and Money Laundering Restrictions

A perusal through legal restrictions on foreign or SWF investment across ten jurisdictions demonstrates that the scope of national security threats has expanded, but the scope does not automatically include corruption, money laundering, and other similar risks. This might be an acceptable situation, however, if governments were to use existing national anti-corruption or anti–money laundering (AML) statues in their countries to target risks from specialized vehicles like SWFs.

In the United States, 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 such as telecommunications or energy and other state-specific laws that restrict foreign investment.¹⁴ But outside of generalized restrictions, there appears to be no publicly available U.S. guidance on how to address or conduct anti–money laundering due diligence on SWFs.

Other countries, such as the United Kingdom (UK), have partial directed guidance on how to address anti–money laundering and counter threat finance (AML/CFT) risks in SWFs. The Joint Money Laundering Steering Group (JMLSG), a private sector body representing the financial sector in the UK, produces guidance to help the industry meet the country’s AML/CFT obligations. Though the guidance provided is not legally binding, it does receive approval from the UK Treasury prior to publication. The guidance is noteworthy in that it specifically calls out the national security threats posed by SWFs because the funds can be used for “political, rather than purely financial objectives, by acquiring controlling interests in strategically important industries or destabilising economies.” Among other positive features, the JMLSG guidance

• specifically requires an entity with AML/CFT obligations to look at the country context from which the SWF originates;
• states that SWFs will typically not qualify for simplified due diligence;
• draws specific attention to the risk of politically exposed persons and SWFs; and
• instructs obliged entities to check whether withdrawals made from the SWF match its mandate and objective.¹⁵

While positive, efficacy of the guidance is reduced because of the overarching directive that SWF-related risks be viewed through the possible destabilizing effect on economies rather than the possible theft of funds or problematic origins of the funds themselves.¹⁶ The guidance does not raise the specific factors that lead to money laundering or corruption.

Another limitation of the JMLSG guidance is that it only captures funds owned by the national government as SWFs, thereby excluding funds like the Alaska Permanent Fund from within its purview.¹⁷ This once again exposes how a lack of uniformity in understanding what an SWF is can affect its due diligence treatment.

India, which is another key SWF investment destination (see chapter 1), also provides directed AML/CFT guidance. However, in contrast to the UK, the country’s capital markets regulator, the Securities and Exchange Board of India, treats SWF investments as Category 1 investments on par with those of other supranational entities like the United Nations and other multilateral organizations, foreign and central banks, and government-related foreign investors. Under Indian regulations, entities classified as Category 1 are automatically qualified as being of lowest risk. This is especially concerning because there is no distinction to be made for due diligence based on the SWF’s origin, mandate, or investment strategy. SWFs get an automatic carte blanche because of their “sovereign” nature.¹⁸ This once again exposes a lack of a consistent international understanding on the types of risks SWFs present.

Because of this lack of scrutiny or interest outside the national security lens, there is almost no information available on certain SWFs that raise red flags. For example, chapter 5 in this compilation highlighted the opacity around the Fund for Future Generations (FFG) in Equatorial Guinea. Two leading data providers on SWFs could not find any verifiable information on how and where the FFG was investing. Similarly, there was no information available on the investment patterns of Malta’s National Social Development Fund (NSDF). There were only mentions of art, money granted to charities, and equity and bond investments in the United States and emerging markets (see chapter 10). This is despite the fact that the funds associated with the NSDF stem from the country’s controversial and much criticized “golden passport” program.

Another particularly glaring example is the State Oil Fund of the Republic of Azerbaijan (SOFAZ). The fund is known for lacking transparency and operating in a country where, according to a 2022 assessment by the U.S. Department of State, “a small group of government-connected holding companies dominates the economy . . . and judicial transparency is lacking.”¹⁹ Critics have raised concerns that projects funded by the SOFAZ are often awarded to companies associated with ruling political elites in Azerbaijan.²⁰ Despite these legitimate concerns, the fund has invested over $1.2 billion in the real estate sector.²¹ The SOFAZ has direct commercial real estate investments in France, Italy, Japan, Russia, and the UK.²² As of 2021, the fund was also expected to invest $400 million in commercial real estate deals in Asia, Europe, and the United States.²³ The fund has been making investments in U.S. real estate since 2015 and was expected to deploy $50 million in unlisted real estate funds across North America and Asia and Europe in 2023.²⁴

A 2020 report titled “The Empty Bucket of the State Oil Fund of Azerbaijan” found that the SOFAZ’s real estate investments globally amount to $2 billion and are managed by subsidiary institutions of the SOFAZ.²⁵ The profits from the real estate sector are supposedly used to pay for the services of these subsidiary institutions, yet the ownership and control of these institutions remain shrouded in mystery. The real estate investments also do not appear to generate profits for the fund itself.²⁶

The SOFAZ invests in real estate through private funds. However, in the United States, these funds are not required to carry out AML/CFT due diligence; and in other countries, regulators have struggled to adequately enforce AML/CFT regulation in this space. The secretive investments made in the United States by Russian oligarch Roman Abramovich, for example, were possible because of the secrecy and lack of due diligence required in the real estate sector. The absence or weakness of regulatory mechanisms in investment destination countries therefore creates a perfect situation whereby subsidiary institutions making deals for the SOFAZ do not undergo necessary scrutiny. Taken together, this exposes gaps not just in the AML/CFT and anti-corruption treatment of SWFs but also in how private investment funds are regulated globally.

Finally, there are concerns that SOFAZ is being used to whitewash the image of Azerbaijan—similar to how Saudi Arabia may be using SWF investments in sports to improve its image and increase its influence despite the potential lack of returns on this investment (see chapter 6). Through the SOFAZ, over the past few years, Azerbaijan has been hosting and funding the Eurovision competition, the first European Games, and the Islamic Solidarity Games, as well as a Formula 1 grand prix.²⁷ But there have been questions about whether these investments have provided benefits to the people of Azerbaijan and about who benefits from the large construction projects undertaken to host these events.²⁸ The organizing bodies for these large international events that award hosting privileges to Azerbaijan do not appear to be concerned about the inherent risks of self-enrichment by political elites in such an economic environment.

To address this basket of corruption, money laundering, and other governance risks associated with SWFs, 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. With this in mind, several policy recommendations could help address those gaps.

• National governments should establish a regulatory rubric that examines SWFs for both national security risks and significant corruption and money laundering risks. This 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 owns or controls it. If the beneficial owner includes a SWF, this should have to be declared as part of the registry process. This is critical for continued information sharing and to track the movement of political elites’ ill-gotten gains, which 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 transaction. The language in the UK’s JMLSG offers a good starting point.
• Jurisdictions should implement more stringent penalties, including the loss of a license and criminal prosecution, for individuals who 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 compilation.
• 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, coinvestments, and direct and indirect investments.

Policy Reform in Countries Where SWFs Are Created

Throughout the history of SWFs, the absence of well-defined, robust governance frameworks has contributed to the loss of billions of dollars as a result of poor investment decisions, mismanagement, and corruption. Both the Libyan and Kuwaiti SWFs lost billions because investments from their respective funds were used to benefit allies close to the country’s regimes or private sector intermediaries responsible for managing the funds’ resources.²⁹

In the case of Libya, prior to the Malaysian 1MDB scandal, Goldman Sachs was implicated in the mismanagement of funds at the Libyan Investment Authority (LIA).³⁰ In a lawsuit filed by the LIA, the fund alleged that Goldman Sachs’ mismanagement had lost the fund $1.2 billion.³¹ A subsequent two-and-a-half-year court battle in the UK ultimately cleared Goldman Sachs of wrongdoing but exposed the bank’s questionable business practices in securing the LIA as a client.³² The LIA made similar allegations of fraud and corruption against three other banks: JP Morgan, Credit Suisse, and Société Générale. Société Générale apologized to the LIA and agreed to a $860 million settlement.³³ For both the JP Morgan and Credit Suisse suits, there was no opportunity to decide them on their merits because they were filed after the statute of limitations had expired.³⁴

In Kuwait’s case, lawsuits filed in New York alleged that the management at Grouo Torras—the holding company for the Kuwait Investment Authority’s Spanish investments—used a network of “shell companies, fictitious loans, fraud and embezzlement” and stole $950 million. As a result, the people of Kuwait lost $5 billion through “colossal mismanagement.”³⁵ The scandal led to the conviction of two individuals on embezzlement charges in Kuwait, legal action in several countries, and a new Kuwaiti law that requires parliamentary scrutiny of investment decisions.³⁶

In other cases, the lack of clear rules on how and when money from SWFs can be withdrawn has allowed billions of dollars to be removed. That was the case for Nigeria’s Excess Crude Account (ECA). The ECA was set up in 2004 to protect Nigeria’s budgets against volatility caused by changing crude oil prices, and it has long faced criticism because successive governments have made arbitrary withdrawals that have rarely provided tangible development benefits to Nigeria.³⁷ In 2022, the ECA was in the headlines because the account’s assets fell to around $375,000 from $2.1 billion in 2015 and $20 billion in 2009.³⁸ In 2019, “$1 billion was withdrawn for the procurement of critical equipment for the Nigerian army, Navy and Air Force; $496 million was paid for 12 Super Tucano attack aircraft for the Air Force, while $380.5 million was disbursed for the procurement of various critical military equipment in a direct government to government contract.”³⁹ There was particular criticism around the acquisition of the Tucano aircraft because that purchase did not receive prior approval from the National Assembly.⁴⁰ A report by Nigeria’s National Economic Council found that 67 percent of withdrawals from the ECA between January 2005 and June 2015 “violated the operating principles of the fund.”⁴¹

Many critics have noted that the ECA has no governance norms concerning deposits, withdrawals, and how the savings can be used.⁴² In 2017, for example, the Natural Resource Governance Institute (NRGI) assessed the ECA as the most poorly governed natural resource–based SWF.⁴³ The institute found that the government failed to disclose any of the “rules or practices governing deposits, withdrawals or investments of the ECA.”⁴⁴ The NRGI even asserted that the account was “so opaque” that there was “no way to know how much may be lost to mismanagement.”⁴⁵ In 2019, the International Monetary Fund (IMF)—using the NRGI’s methodology—found that out of thirty-three natural resource–based SWFs, the ECA was the second-most poorly governed SWF.⁴⁶

Another risk typically seen with SWFs is that ruling governments use them to bypass the budget process, which usually requires parliamentary approval. The SOFAZ, for instance, does not require parliamentary approval, and funds can be directly executed at the behest of the president.⁴⁷ Similarly, Türkiye’s SWF has been used as a parallel budget that can avoid most parliamentary scrutiny and oversight (see chapter 8).

Fortunately, substantive work has 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 mechanisms or investigative journalism, 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 corruption, money laundering, and governance challenges.

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. One of the three objectives of the SOFAZ is “preserving macroeconomic stability,” but there is no definition on what exactly this constitutes in Azerbaijan.⁴⁸
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.⁴⁹
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 in the United Arab Emirates do not have withdrawal and deposit rules.⁵⁰ 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; and 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.⁵¹ SWFs must 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.⁵²

Revisiting and Reframing International Standards on SWFs

Chapters 1 and 2 of this compilation set out the international standards, norms, and guidance documents that govern the operation of SWFs. These introductory chapters, and the case studies that follow, show that SWFs globally operate in an environment of soft norms. Notably, the International Forum of Sovereign Wealth Funds (IFSWF), which is the main organizing body for SWFs, and its associated Santiago Principles, which include SWF best practices formalized in 2008, were created to “address the issues surrounding excess reserve accumulation, as well as appease national security concerns emanating from foreign government-affiliated investments.”⁵³ This language from the IFSWF’s website is rather telling and demonstrates the dual intent behind these principles: to ensure the appropriate governance of SWFs and provide peace of mind to countries where SWFs invest. However, since their creation, the twenty-four Santiago Principles have remained entirely voluntary and have not been reviewed or updated. The fact that they are voluntary and appear to have been created to “appease” rather than provide a “robust standard” helps make the case that SWFs are ill-equipped to address and enforce the governance challenges such funds and the security concerns of the countries where they invest. This inability to address security concerns is evident, given that in the fifteen years since the principles came into being, countries have had to expand the laws and restrictions governing foreign investment. For example, in 2005, less than five countries had investment screening procedures.⁵⁴ By 2022, this number had shot up to over thirty-five countries with investment screening procedures (see figure 3 ).⁵⁵

While the Santiago Principles have long provided clear context for studying and regulating SWFs’ impact, nowhere in the drafting language is there an explicit reference to the potential for abuse. Because the principles have remained static, they do not account for recent changes in how SWFs are used and operated. For instance, principle 14 (more technically referred to as GAPP 14), which supports the creation of adequate internal policies for SWFs when dealing with third parties, does not account for a mechanism to deal with external governance considerations when an SWF directly interacts with the global financial system.⁵⁶ Similarly, GAPP 18.2 states that “the investment policy should address the extent to which internal and/or external investment managers are used, the range of their activities and authority, and the process by which they are selected, and their performance monitored.”⁵⁷ Yet this once again ignores the risks presented from the investments themselves.

When the language was first drafted, SWFs were comprised of primarily passive investors relying on external fund managers.⁵⁸ However, since then, the mandates, objectives, investment strategies, and types of SWF funding models have drastically evolved. Today’s SWFs are active direct investors that often coinvest with private sector entities (see chapter 1). Yet the Santiago Principles do not advocate that SWFs disclose or assess their investments on economic and financial grounds.⁵⁹ As noted by one assessment, the Santiago Principles are inward-looking and appear ill-equipped to address the governance risks of SWFs that operate as external actors.⁶⁰

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.”⁶¹ Explicitly recognizing this increase and enhancing the disclosure requirements for these arrangements would alleviate concerns around both national security and corruption risks.⁶² For instance, the more recent expansion of powers under the U.S. CFIUS review process was done to address Chinese and Russian investments in sensitive U.S. technology spaces masked as investments through U.S. private investment funds (see chapter 1).⁶³

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 Industries Transparency Initiative—which sets best practices for oil, gas, and mining governance—include this requirement.

Apart from the gaps within the Santiago Principles, another concern is the legitimacy SWFs receive from being part of the IFSWF. Members are only required to carry out self-assessments. For instance, Azerbaijan’s SOFAZ assesses itself as meeting the requirements under all relevant Santiago Principles, but there are real concerns about how projects through the fund are approved and how payments are made through the SOFAZ.

Similarly, in its 2016 self-assessment, Angola’s Fundo Soberano de Angola (see chapter 4) stated that it was meeting most governance standards, but soon after, an exposé was published on the fund’s mismanagement and the conflicts of interest surrounding its fund manager.

IFSWF members in theory support the idea of transparency, as it can enhance domestic legitimacy of the SWF, improve communication with relevant stakeholders, and have an overall positive impact on the SWF’s reputation.⁶⁴ However, as laid out in chapter 2, “voluntary participants’ compliance with the Santiago Principles is still alarmingly low.” 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 SWFs to critically examine their frameworks. Also, because the language of the Santiago Principles is broad, there is no effective way to determine whether the required disclosures meet a necessary standard to mitigate the risks of corruption and money laundering and foster good governance. A comparable example would be if countries were allowed to determine whether they adequately meet the international AML/CFT requirements of the Financial Action Task Force’s forty recommendations but without the assistance of guiding criteria on what constituted an effective beneficial ownership law or customer due diligence practice. This overhaul of international standards must involve greater dialogue and guidance from both the Organisation for Economic Co-operation and Development (OECD) and IMF. Current language from the OECD entirely focuses on the national security prism; and the IMF, unlike its work on state-owned enterprises, couches best practices in terms of increasing legitimacy and does not outrightly refer to the problem of corruption.

Therefore, SWF reform will not trickle down to the country level unless there are measurable international standards against which SWFs are compared. With this in mind, the following policy recommendations may help address the 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 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.⁶⁵

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. Valuable lessons abound from the experiences of countries that have successfully transitioned from natural resource dependent economies to diversified economies. At the same time, this compilation and the reforms suggested serve to highlight the need for more critical study around the corruption, money laundering, and associated governance risks of SWFs. Failure to understand these risks will lead to SWFs failing to deliver on their promises of providing economic security and generational wealth for citizens.

Notes

¹ Robert D. Lamb, Kathryn Mixon, and Sadika Hameed, “Sovereign Wealth Funds in Commodity-Rich Fragile States,” May 13, 2013, https://www.csis.org/analysis/sovereign-wealth-funds-commodity-rich-fragile-states; and The Economist, “The Dutch Disease,” University of Oslo, November 26, 1977, https://www.uio.no/studier/emner/sv/oekonomi/ECON4925/h08/undervisningsmateriale/DutchDisease.pdf. Dutch disease describes the paradox wherein a country’s discovery and exploitation of its natural resources can often harm other parts of its economy. The case that helped coin the term occurred after the Netherlands discovered vast natural gas deposits in 1959. This newfound wealth and exponential growth in oil exports caused the Dutch guilder to rise very sharply, making it less competitive for all other non-oil export Dutch products. Unemployment in the Netherlands rose from 1.1 percent to 5.1 percent as a result.

² Andrew Bauer and Perrine Toledano, “Managing the Public Trust: How to Make Natural Resource Funds Work for Citizens,” Columbia Center on Sustainable Investment, https://people.climate.columbia.edu/projects/view/1151.

³ “Global Foreign Direct Investment Flows Over Last 30 Years,” UN Conference on Trade and Development, May 5, 2023, https://unctad.org/data-visualization/global-foreign-direct-investment-flows-over-last-30-years.

⁴ “Select USA: Indirect Jobs Supported by U.S. Exports,” International Trade Administration, U.S. Department of Commerce, 2, https://www.trade.gov/sites/default/files/2022-04/IndirectJobsSelectUSABrief.pdf.

⁵ “Sovereign Wealth Funds: Laws Limiting Foreign Investment Affect U.S. Assets and Agencies Have Various Enforcement Processes,” U.S. Government Accountability Office, May 2009, https://www.gao.gov/assets/gao-09-608.pdf.

⁶ “National Defense Authorization Act for Fiscal Year 1993,” Public Law 102–484, U.S. Congress, October 23, 1992, https://www.congress.gov/102/statute/STATUTE-106/STATUTE-106-Pg2315.pdf.

⁷ Scott Horsley, “Lessons for Today From the U.S.-Japan Trade War of the 1980s,” NPR, May 20, 2019, https://www.npr.org/2019/05/20/725139664/lessons-for-today-from-the-u-s-japan-trade-war-of-the-1980s.

⁸ Mark E. Talisman, “CFIUS and China: The FIRRMA Factor,” Diplomat, October 26, 2018, https://thediplomat.com/2018/10/cfius-and-china-the-firrma-factor; and “Executive Order on Ensuring Robust Consideration of Evolving National Security Risks by the Committee on Foreign Investment in the United States,” White House, September 15, 2022, https://www.whitehouse.gov/briefing-room/presidential-actions/2022/09/15/executive-order-on-ensuring-robust-consideration-of-evolving-national-security-risks-by-the-committee-on-foreign-investment-in-the-united-states.

⁹ Reed Smith Client Alerts, “Executive Order Directs CFIUS to Expand Review of National Security Factor,” Reed Smith, October 5, 2022, https://www.reedsmith.com/en/perspectives/2022/10/executive-order-directs-cfius-to-expand-review-of-national-security-factors.

¹⁰ David Marchick, “Sovereign Wealth Funds and National Security: OECD/City of London Conference,” Carlyle Group, March 31, 2006, 11, https:///www.oecd.org/investment/investment-policy/40395077.pdf.

¹¹ James Flanigan, “Company News; Semi-Gas Systems,” New York Times, December 29, 1990, https://www.nytimes.com/1990/12/29/business/company-news-semi-gas-systems.html.

¹² Reuters, “Thomson of France in Offer for LTV Units,” New York Times, April 2, 1992, https://www.nytimes.com/1992/04/02/business/thomson-of-france-in-offer-for-ltv-units.html.

¹³ Marchick, “Sovereign Wealth Funds and National Security,” 60.

¹⁴ A comprehensive list can be found in “Sovereign Wealth Funds: Laws Limiting Foreign Investment Affect U.S. Assets and Agencies Have Various Enforcement Processes,” U.S. Government Accountability Office.

¹⁵ Carol J. Smit, ed., “Prevention of Money Laundering/Combating Terrorist Financing: Guidance for the UK Financial Sector: Part I,” Joint Money Laundering Steering Group, July 2022, 111–14, https://www.jmlsg.org.uk/wp-content/uploads/2022/07/JMLSG-Guidance-Part-I_July-2022.pdf.

¹⁶ Smit, “Prevention of Money Laundering/Combating Terrorist Financing.”

¹⁷ Smit, “Prevention of Money Laundering/Combating Terrorist Financing.”

¹⁸ “KYC Requirements for Eligible Foreign Investors,” Securities and Exchange Board of India, September 12, 2013, https://www.sebi.gov.in/legal/circulars/sep-2013/kyc-requirements-for-eligible-foreign-investors_25366.html.

¹⁹ “2022 Investment Climate Statements: Azerbaijan,” Bureau of Economic and Business Affairs, U.S. Department of State, https://www.state.gov/reports/2022-investment-climate-statements/azerbaijan/.

²⁰ David Humphreys, “Six Reasons Why Sovereign Wealth Funds Should Not Invest or Spend at Home,” Natural Resource Governance Institute, February 23, 2021, https://resourcegovernance.org/blog/six-reasons-why-sovereign-wealth-funds-should-not-invest-or-spend-home-0.

²¹ Prequin 2023, reports accessed by the author.

²² Prequin 2023, reports accessed by the author.

²³ Prequin 2023, reports accessed by the author.

²⁴ Prequin 2023, reports accessed by the author.

²⁵ Gubad Ibadoghlu, “The Empty Bucket of the State Oil Fund of Azerbaijan: Profits and Profiteering,” Crude Accountability, 2020, 26, https://crudeaccountability.org/wp-content/uploads/The_Empty_Bucket_report_web.pdf.

²⁶ Ibadoghlu, “The Empty Bucket of the State Oil Fund of Azerbaijan,” 28.

²⁷ Ibadoghlu, “The Empty Bucket of the State Oil Fund of Azerbaijan,” 5.

²⁸ Emin Huseynov, “Baku’s Grand Prix Is Being Used to ‘Sportswash’ Corruption,” Guardian, June 18, 2016, https://www.theguardian.com/commentisfree/2016/jun/18/formula-1-azerbaijan-human-rights; Roberto Martinez B. Kukutschka, “Azerbaijan: Overview of Corruption and Anti-Corruption,” Transparency International, September 7, 2017, https://knowledgehub.transparency.org/helpdesk/azerbaijan-overview-of-corruption-and-anti-corruption; and Gubad Ibadoghlu, “Corrupt and Flashy Events Disguised as Modernization in Azerbaijan,” Crude Accountability, 2019, https://crudeaccountability.org/corrupt-and-flashy-events-disguised-as-modernization-in-azerbaijan.

²⁹ Matthew Campbell and Kit Chellel, “How Goldman Sachs Lost $1.2 Billion of Libya’s Money,” Bloomberg, March 31, 2023, https://www.bloomberg.com/features/2016-goldman-sachs-libya; Roger Cohen, “Missing Millions—Kuwait’s Bad Bet—A Special Report—Big Wallets and Little Supervision,” New York Times, September 28, 1993, https://www.nytimes.com/1993/09/28/business/missing-millions-kuwait-s-bad-bet-special-report-big-wallets-little-supervision.html; “Latest Libyan Investment Authority Claim Dismissed at Interim Stage on Limitation Grounds,” Stewarts, December 6, 2021, https://www.stewartslaw.com/news/latest-libyan-investment-authority-claim-dismissed-at-interim-stage-on-limitation-grounds; and 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.

³⁰ Campbell and Chellel, “How Goldman Sachs Lost $1.2 Billion of Libya’s Money”; and Cohen, “Missing Millions.”

³¹ Campbell and Chellel, “How Goldman Sachs Lost $1.2 Billion of Libya’s Money.”

³² This allegedly included flying the LIA’s fund manager to Dubai from Morocco, paying for his five-star hotel accommodation, and arranging and paying for two prostitutes to spend the evening with him. Carolyn Cohn, “Goldman Exec Tells Libya Fund Trial That Offering Prostitutes ‘Unacceptable,’” Reuters, June 30, 2016, https://www.reuters.com/article/us-libya-swf-litigation/goldman-exec-tells-libya-fund-trial-that-offering-prostitutes-unacceptable-idUSKCN0ZG319.

³³ The LIA alleged that Société Générale paid a bribe of $58.5 million that allowed the bank to get the LIA’s business and execute five financial trades, which resulted in losses to the LIA. Stothard and Croft, “SocGen Agrees €963m Settlement with Libyan Investment Authority.”

³⁴ “Latest Libyan Investment Authority Claim Dismissed at Interim Stage on Limitation Grounds,” Stewarts; and Stothard and Croft, “SocGen Agrees €963m Settlement with Libyan Investment Authority.”

³⁵ Roger Cohen, “Missing Millions.”

³⁶ “Kuwait Committee to Visit London for Sovereign Fund Probe,” Reuters, July 13, 2015, https://www.reuters.com/article/uk-kuwait-swf-probe/kuwait-committee-to-visit-london-for-sovereign-fund-probe-idUKKCN0PN1AA20150713.

³⁷ “Nigeria’s Four Seasons of Lavishness With N15.46 Trillion Excess Crude Fund,” Dataphyte (blog), March 15, 2019, https://www.dataphyte.com/latest-reports/extractive/nigerias-four-seasons-of-lavishness-with-n15-46-trillion-excess-crude-fund.

³⁸ “Depletion of Excess Crude Account Resurrects Questions on Its Legality, Exposes Weak Oversight,” PLACNG (blog), August 16, 2022, https://placng.org/Legist/depletion-of-excess-crude-account-resurrects-questions-on-its-legality-exposes-weak-oversight; and “Nigeria’s Excess Crude Account (ECA) Falls By 89%,” YouTube video, posted by News Central TV, November 25, 2022, https://www.youtube.com/watch?v=laP_oIVcM9A.

³⁹ “Depletion of Excess Crude Account Resurrects Questions on its Legality, Exposes Weak Oversight,” PLACNG.

⁴⁰ Nasir Ayitogo, “After Approving $462m for Aircraft, Buhari Formally Seeks Reps Approval,” Premium Times, April 24, 2018, https://www.premiumtimesng.com/news/top-news/266068-after-approving-462m-for-aircraft-buhari-formally-seeks-reps-approval.html.

⁴¹ Pallavi Roy et al., “When Rainy Day Funds Run Dry: Corruption and Mismanagement of Nigeria’s Excess Crude Account,” Anti-Corruption Evidence SOAS Consortium, April 2022, 24, https://eprints.soas.ac.uk/37907/1/ACE-WorkingPaper045-Nigeria-ECA.pdf.

⁴² Joshua Olufemi and Richard Akinwumi, “Investigation: At Least ₦11.56 Trillion Excess Crude Fund Unaccounted for in 8 Years,” Premium Times (blog), July 16, 2015, https://www.premiumtimesng.com/investigationspecial-reports/186780-investigation-at-least-%E2%82%A611-56-trillion-excess-crude-fund-unaccounted-for-in-8-years.html.

⁴³ “Nigeria (Oil and Gas),” Resource Governance Index, 3, https://api.resourcegovernanceindex.org/system/documents/documents/000/000/316/original/Resource_Governance_Index_Nigeria_oil_and_gas_profile_%28English%29.pdf?1623749732.

⁴⁴ “Nigeria (Oil and Gas),” Resource Governance Index.

⁴⁵ “Nigeria’s Crude Account One of World’s Least Transparent—NRGi,” CNBC Africa, June 29, 2017, https://www.cnbcafrica.com/2017/nigerias-crude-account-one-worlds-least-transparent-nrgi/.

⁴⁶ Bassey Udo, “IMF Clarifies Report on Nigeria’s Sovereign Wealth Fund,” Premium Times (blog), August 13, 2019, https://www.premiumtimesng.com/business/business-news/325207-imf-clarifies-report-on-nigerias-sovereign-wealth-fund.html.

⁴⁷ Kenan Aslanli, “Fiscal Sustainability and the State Oil Fund in Azerbaijan,” Journal of Eurasian Studies 6, no. 2 (2015): 114–21, https://doi.org/10.1016/j.euras.2015.03.004; and Rebeka Foley, “Corruption on the Caspian: Fueling Aliyev’s Regime,” Freedom House, July 26, 2016, https://freedomhouse.org/article/corruption-caspian-fueling-aliyevs-regime.

⁴⁸ “Santiago Principles Self-Assessment: State Oil Fund of Azerbaijan,” International Forum of Sovereign Wealth Funds, n.d., https://www.ifswf.org/assessment/sofaz.

⁴⁹ Bauer and Toledano, “Managing the Public Trust.”

⁵⁰ Azerbaijan, Botswana, Iran, and Kuwait do not have withdrawal rules for their SWFs. Botswana also does not have deposit rules for its SWF.

⁵¹ Daniel Gross, “Little Sovereign Wealth Fund on the Prairie,” Slate, May 29, 2014, https://slate.com/business/2014/05/north-dakota-sovereign-wealth-fund-the-state-holds-tight-to-its-sense-of-midwestern-frugality.html; Joe Marsh, “Why Norway’s 1.3 Trillion Fund Prizes Transparency So Highly,” Capital Monitor, June 22, 2021, https://capitalmonitor.ai/institution/asset-owners/why-norways-1-3trn-wealth-fund-prizes-transparency-so-highly; “Permanent School Fund Named Finalist for the Sovereign Wealth Fund of the Year Award,” Texas Education Agency, April 15, 2019, https://tea.texas.gov/about-tea/news-and-multimedia/news-releases/sboe-news/permanent-school-fund-named-finalist-for-the-sovereign-wealth-fund-of-the-year-award; and Bauer and Toledano, “Managing the Public Trust.”

⁵² Bauer and Toledano, “Managing the Public Trust.”

⁵³ Adam D. Dixon and Imogen T. Liu, “Santiago Principles 2.0: Advancing the Agenda,” International Forum of Sovereign Wealth Funds, n.d., https://archive.ifswfreview.org/2018/our-partners/santiago-principles-20-advancing-agenda.

⁵⁴ “Development and Globalization: Facts and Figures 2022,” United Nations Conference on Trade and Development, Division on Investment and Enterprise, February 2023, 4, https://unctad.org/system/files/official-document/diaepcbinf2023d2_en.pdf.

⁵⁵ “Development and Globalization: Facts and Figures 2022,” United Nations Conference on Trade and Development, 4.

⁵⁶ “Santiago Principles: Generally Accepted Principles and Practices,” International Forum of Sovereign Wealth Funds, https://www.ifswf.org/sites/default/files/santiagoprinciples_0_0.pdf, GAPP 14.

⁵⁷ “Santiago Principles: Generally Accepted Principles and Practices,” International Forum of Sovereign Wealth Funds, GAPP 18.2.

⁵⁸ Bénédicte Bull and Katerina Standish, “The Politics of Sovereign Wealth Funds,” in Handbook on Wealth and the Super-Rich, ed. Iain Hay (Cheltenham, UK: Edward Elgar Publishing, 2021), 79-81.

⁵⁹ Dixon and Liu, “Santiago Principles 2.0: Advancing the Agenda.”

⁶⁰ Dixon and Liu, “Santiago Principles 2.0: Advancing the Agenda.”

⁶¹ Dixon and Liu, “Santiago Principles 2.0: Advancing the Agenda.” Chapter 1 discusses this in greater detail when looking at the different ways in which SWFs invest, including participating in investment strategies with the private sector.

⁶² Dixon and Liu, “Santiago Principles 2.0: Advancing the Agenda.”

⁶³ The Committee on Foreign Investments in the United States (CFIUS) is an interagency committee that reviews foreign investments and certain real estate transactions by foreign persons that may negatively impact U.S. national security interests. See “The Committee on Foreign Investment in the United States (CFIUS),” U.S. Department of the Treasury, https://home.treasury.gov/policy-issues/international/the-committee-on-foreign-investment-in-the-united-states-cfius.

⁶⁴ However, most SWFs felt that transparency did not offer any commercial advantage. See Abdullah Al-Hassan, Michael Papaioannou, Martin Skancke, and Cheng Chih Sung, “Sovereign Wealth Funds: Aspects of

Governance Structures and Investment Management,” International Monetary Fund working paper 13/231, November 2013, https://www.imf.org/external/pubs/ft/wp/2013/wp13231.pdf.

⁶⁵ This process should ensure that SWFs in developing countries are not unfairly targeted, as this has potential consequences for de-risking. There has been criticism around global listing processes. For more information, see the testimony of Barbadian Prime Minister Mia Amor Mottley: “When Banks Leave: The Impacts of De-Risking on the Caribbean and Strategies for Ensuring Financial Access,” Statement of 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.

As noted in chapter 1, this compilation uses the Santiago Principles’ definition of SWFs but also examines other funds that are in practice regularly treated as SWFs. Other organizations use more expansive definitions of SWFs. The Sovereign Wealth Fund Institute, a globally recognized subscription-based research platform, states that SWFs include a wide variety of state-owned investment vehicles, and it makes no restrictions based on where the investment is deployed. This definition is in line with the one used by the International Forum of Sovereign Wealth Funds (IFSWF), a leading voluntary organization of SWFs that aims to help SWFs implement the Santiago Principles.¹ Similarly, the United States and the European Union (EU), respectively, define SWFs as “government investment funds, funded by foreign currency reserves but managed separately from official currency reserves” and as “state-owned investment vehicles, which manage a diversified portfolio of domestic and international financial assets, and generally accept a high level of risk in search of higher returns.”² Table 1 lists the most common SWF definitions.

Notes

¹ The IFSWF counts the Türkiye Wealth Fund as a member, even though it does not expressly meet the definitional requirements of the Santiago Principles.

² PLC Corporate & Securities and PLC Finance, “US Treasury Reports on Sovereign Wealth Fund Investment Policies,” Thomson Reuters, December 11, 2008, https://content.next.westlaw.com/practical-law/document/Ibb0a61faef0511e28578f7ccc38dcbee/Legal-Update-US-Treasury-Reports-on-Sovereign-Wealth-Fund-Investment-Policies?viewType=FullText&originationContext=document&transitionType=DocumentItem&ppcid=80e32ce08a3f4efa950f8bb2b07ffd32&contextData=(sc.Glossary)&firstPage=true; https://eur-lex.europa.eu/EN/legal-content/summary/a-common-european-approach-to-sovereign-wealth-funds.html.

³ “Sovereign Wealth Funds: Generally Accepted Principles and Practices—‘Santiago Principles,’” International Working Group of Sovereign Wealth Funds, October 2008, 3–4, 27, https://www.ifswf.org/sites/default/files/santiagoprinciples_0_0.pdf.

⁴ PLC Corporate & Securities and PLC Finance, “US Treasury Reports on Sovereign Wealth Fund Investment Policies”; and “Glossary: Sovereign Wealth Funds,” Thomson Reuters, accessed April 5, 2023, https://content.next.westlaw.com/Glossary/PracticalLaw/I03f4d832eee311e28578f7ccc38dcbee?transitionType=Default&contextData=(sc.Default)&firstPage=true.

⁵ Javier Capape Aguilar, “Sovereign Wealth Funds: From Traditional Banking to Artificial Intelligence,” IE Insights (blog), October 13, 2017, https://www.ie.edu/insights/articles/sovereign-wealth-funds-from-traditional-banking-to-artificial-intelligence/.

⁶ Freddy Orchard, “The Rise of Sovereign Wealth Funds,” GIC, February 26, 2020, 2, https://www.gic.com.sg/wp-content/uploads/2021/04/GIC-ThinkSpace-The-Rise-of-Sovereign-Wealth-Funds.pdf.

⁷ “What Is a Sovereign Wealth Fund?,” SWFI, https://www.swfinstitute.org/research/sovereign-wealth-fund.

⁸ “Sovereign Wealth Funds—A Work Agenda,” International Monetary Fund, February 29, 2008, 4, https://www.imf.org/en/Publications/Policy-Papers/Issues/2016/12/31/Sovereign-Wealth-Funds-A-Work-Agenda-PP4234.

⁹ “A Common European Approach to Sovereign Wealth Funds,” EUR-Lex, October 10, 2008, https://eur-lex.europa.eu/EN/legal-content/summary/a-common-european-approach-to-sovereign-wealth-funds.html.

There is no universal definition of corruption, and what constitutes corruption is controversial.¹⁰ For the purposes of this compilation, the authors use the definition proffered by Transparency International, which is “the abuse of entrusted power for private gain.”¹¹ 

Many organizations, including the World Bank, Organisation for Economic Co-operation and Development, the International Monetary Fund (IMF), and Basel Institute on Governance use variations of this definition. The World Bank and IMF, for example, define corruption as “the abuse of public office for private gain,”¹² while the Basel Institute on Governance uses the very similar “abuse of public office for personal gain.”¹³

The Transparency International definition has been chosen by the compilation’s editors because of the role of “entrusted power” in corruption and other governance lapses associated with sovereign wealth funds. Some of the issues highlighted in this compilation that raise red flags for potential corruption were not undertaken explicitly by those in an official capacity as part of a public office but instead were private enterprises and individuals that had been designated or delegated various authorities by governments. For instance, in some cases, private investment funds undertook investments of sovereign wealth resources on behalf of governments that could be perceived as a potential conflict of interest, such as investing funds in projects owned by those running the private investment fund. While these private firms are not “public offices,” they are acting with “entrusted power” on behalf of governments, hence the applicability of the Transparency International definition.

Transparency International is the oldest global anti-corruption civil society organization, and its Corruption Perceptions Index is considered the gold standard of corruption-associated indices (though it has gaps in methodology). Transparency International’s corruption definition is thus considered an authoritative one by good governance scholars, civil society, and governments.

Notes

¹ For an exhaustive examination of the challenges of defining corruption, see Laura S. Underkuffler, “Defining Corruption: Implications for Action,” in Corruption, Global Security, and World Order, ed. Robert I Rotberg, (Washington, DC: Brookings Institution, 1999), pages 27–46.

¹¹ “What Is Corruption?,” Transparency International, https://www.transparency.org/en/what-is-corruption.

² “Anticorruption Fact Sheet,” The World Bank, February 19, 2020, https://www.worldbank.org/en/news/factsheet/2020/02/19/anticorruption-fact-sheet; and “Governance and Anti-corruption,” International Monetary Fund, https://www.imf.org/en/Topics/governance-and-anti-corruption. 

³ “What Is Corruption?,” Basel Institute on Governance, https://baselgovernance.org/what-is-corruption.

About The Authors

Jodi Vittori is Professor of Practice and co-chair of the Global Politics and Security program at Georgetown University’s Walsh School of Foreign Service and a non-resident scholar with the Carnegie Endowment for International Peace.

Lakshmi Kumar is the former policy director at Global Financial Integrity and is an adjunct professor at Georgetown University. She has also been a senior fellow at George Mason University as well as a lawyer and policy professional in India, working with governments and regulatory agencies across South Asia, East Africa, and Eurasia to investigate money laundering and terrorist financing risks to their financial systems.

David Szakonyi is associate professor of political science at George Washington University and co-founder of the Anti-Corruption Data Collective. His academic research focuses on corruption, clientelism, and political economy in Russia, Western Europe, and the United States. His most recent book, Politics for Profit: Business, Elections, and Policymaking in Russia (Cambridge University Press, Cambridge Studies in Comparative Politics, 2020), examines why businesspeople run for political office and how their firms benefit. He has also led numerous investigations into political corruption and opacity in the private equity and real estate industries published in the Washington Post, Foreign Policy, the Daily Beast, and the Miami Herald, among other outlets. He received his PhD in political science from Columbia University and his BA from the University of Virginia.

Clare Rewcastle Brown is a British journalist and writer for the anti-corruption website Sarawak Report, which since 2015 has gained wide recognition for its original and early exposure of the 1Malaysia Development Berhad scandal.

Caleb Diamond recently graduated from Georgetown University with an M.S. in foreign service. His professional experience includes stints at the United States Institute of Peace, Peacekeeping and Stability Operations Institute, United Nations Department of Peace Operations, and Center for Strategic and International Studies.

Kristian Coates Ulrichsen is the fellow for the Middle East at Rice University’s Baker Institute for Public Policy. Prior to joining the Baker Institute in 2013, Coates Ulrichsen worked at the London School of Economics and also held an affiliation with the Royal Institute of International Affairs (Chatham House). Coates Ulrichsen is the author of six books about the political economy and international relations of the Gulf States, of which the most recent is Centers of Power in the Arab Gulf States (Hurst & Co., 2023).

Aykan Erdemir was the senior director of the Turkey program at the Foundation for Defense of Democracies when this chapter was researched and written. Erdemir was a law- maker in the Turkish Parliament between 2011 and 2015 and served in the EU-Turkey Joint Parliamentary Committee, EU Harmonization Committee, and the Ad Hoc Parliamentary Committee on the IT Sector and the Internet.

Nate Sibley is a research fellow at Hudson Institute’s Kleptocracy Initiative, where he conducts policy research on countering authoritarian corruption. He works closely with the U.S. government and has been published in the Wall Street Journal, Washington Post, and Foreign Policy.