A sovereign wealth fund can bring forth numerous benefits to a country if handled with expertise, integrity, and diligence. However, despite its advantages, having one is not suitable under certain circumstances. One such circumstance is when a country has a political environment marred by pervasive corruption.
Scholarship and documented reports on sovereign wealth funds have shown that political elites can corrupt the management of these investment funds to benefit them and bolster their political and greater socioeconomic positions. This transpires in corruption-ridden countries with weak legal institutions and unrepresented citizenries.
Forms of Corruption Involving Sovereign Wealth Funds
Remember that sovereign wealth funds are state-owned investment funds created to build wealth for future use or economic development initiatives and managed by a government-appointed board or committee. The large pool of financial resources of these funds can tempt imprudent authorities to use them in advancing their self-serving interests.
Sovereign wealth funds are essentially susceptible to mismanagement and corruption. There are different methods in which corrupt officials or authorities use these investment funds as a vehicle for personal gains. Understanding how corruption transpires in sovereign wealth funds requires recognizing the relevant forms of corruption or corrupt practices.
Below are the common forms of corruption involving these funds:
• Embezzlement: This involves authorities responsible for managing the sovereign wealth fund diverting funds for personal gains. Specific examples include misappropriation of assets, transferring funds to offshore accounts, or using management resources for ventures not related to fund management.
• Bribery: Receiving bribes or kickbacks from companies or individuals seeking preferential treatment concerning investment decisions and allocations or access to confidential information that can give them unfair advantages is also another form of corruption involving sovereign wealth funds.
• Favoritism: This involves nepotism or cronyism in which unqualified family members or close associates are given positions in the management of the investment fund or companies of family members and close associates are given preferential treatment regarding the awarding of investment allocations.
• Interference: Using the sovereign wealth fund to advance the political and socioeconomic interests of people in power rather than for its purported economic benefits is another form of corruption. The investment fund becomes a tool to build political patronage and expand political influence.
Addressing corruption involving sovereign wealth funds requires a multi-faceted approach that combines legal, institutional, and societal measures. This includes legislating and enforcing anti-corruption laws, strengthening transparency and accountability requirements, participating in international cooperative organizations and forums, and engaging the media and public to become more aware of and involved in the investment fund.
Examples of Corruption Involving Sovereign Wealth Funds
There are several examples of sovereign wealth fund scandals in history. They were built around misconduct and misuse perpetrated by corrupt government officials and their cohorts to line up their pockets or expand their political influence. These scandals were carried out through various forms of corruption but produced similar outcomes centered on significant financial losses. Some even resulted in complete fund exhaustion.
Below are examples of corruption scandals involving these funds:
1. Malaysia: 1Malaysia Development Berhad Scandal
Foreign law enforcement agencies, including the U.S. Department of Justice and its Federal Bureau of Investigation probable corruption involving the Malaysian sovereign wealth fund 1Malaysia Development Berhad 1MBD. Reports that emerged in 2015 revealed that about USD 11 billion had been siphoned off the investment fund.
The embezzled funds were laundered and misappropriated to Swiss bank accounts, used to purchase real estate properties and expensive collections such as artworks and jewelry, support the lavish lifestyles of perpetrators, pay personal debts, and bribe government officials in Malaysia and authorities in the United Arab Emirates.
Several high-ranking officials and prominent personalities were implicated in the scandal. These include former Malaysian Prime Minister Najib Razak and businessman Low Take Jho. The 1MBD scandal has been described as one of the largest financial scandals in the world and the U.S. considered it the largest kleptocracy case to date.
2. Libya: Libyan Investment Authority Allegations
The State of Libya has a sovereign wealth fund managed through the Libyan Investment Authority. It was established in 2006 under the administration of Muammar Gaddafi as a vehicle for investing the surplus revenues from oil exportation to build wealth for future generations and generate funds for pursuits related to economic development.
Gaddafi and some of his close associates were accused of using the investment fund for personal financial gains and advancing their political influence. The United Nations estimated that about USD 500 billion had been looted from the Libyan Investment Authority but the actual amount of stolen money may be much higher.
Furthermore, after the removal of Gaddafi from office in 2011, the sovereign wealth fund remained involved in numerous allegations of corruption. The Libyan Investment Authority had an anomalous transaction with controversial Indonesian Islamic cleric Habib Rizieq in 2016 and was found to bribe a French aerospace company in 2018.
Take note that the sovereign wealth fund of Libya had assets worth that was valued over USD 70 billion when it was established in 2006. Much of the value of the entire investment fund had been lost due to corruption and it ended with about USD 10 billion in assets. Renewed management had brought its value to over USD 60 billion.
3. Venezuela: National Development Fund Scandal
Rampant corruption has been considered one of the main factors behind the prevailing political instability and severe economic crisis in Venezuela. Critics and observers have noted how the government of former president Hugo Chavez drove most Venezuelans to poverty through inefficient economic management and corrupt practices.
It is interesting to underscore the fact that the country did not have a buffer against economic downturns despite its sizeable oil reserves and a supposed sovereign wealth fund called the Fondo Para El Desarrollo Nacional or Fund for National Development that was established in 2005 to manage and invest oil revenue surpluses.
The investment fund has been criticized for its lack of transparency and accountability. Some critics have alleged that Chavez used the fund for personal and political gains. Details about the investment allocations and gains from its performance remain unknown because its operations are shrouded in secrecy and it has never been audited.
4. Angola: Fundo Soberano de Angola Controversy
The Fundo Soberano De Angola or FSDEA is the sovereign wealth fund of Angola that was first announced in 2008 and launched in 2012 under the government of former president José Eduardo dos Santos. It was the second-largest sovereign wealth fund in Sub-Saharan Africa at its inception with an initial capital of USD 5 billion.
Annual funding comes from a portion of the total revenues generated from oil exports. The stated purpose of the investment fund is to promote socio-economic development across Angola and create generational wealth for the future of Angolan people through long-term investments that would generate a targeted 5 percent to 7 percent returns.
However, in 2018, the son of dos Santos, José Filomeno dos Santos, was arrested and charged with fraud and corruption related to his management of FSDEA. He was accused of transferring USD 500 million from the fund to a Swiss bank account without authorization and using the same fund to purchase properties and finance his lifestyle.
The value of the investment fund went down from USD 5 billion to USD 1 billion due to mishandling. The government that replaced dos Santos made sweeping changes to retain the fund and improve its transparency. The fund has alleged adherence to the Santiago Principles and has been audited by an external independent auditor.