Friday, May 29, 2020

Book #8: Billion Dollar Whale's Life Lessons

This is a continuation of the previous post.

In the last post discussing Billion Dollar Whale, the book depicting fully the 1MDB scandal and Jho Low's craziness, we learnt a few lessons on fraud detection. Today, we would discuss the last simple trick he used - putting in slight discrepancy in names of bank accounts and incorporated entities.

In order to fool people, Jho Low created shell companies which he controlled in Cayman Islands and other jurisdictions with very relaxed rules and regulations. These jurisdictions are happy to simply collect fees, without doing too many checks, including the previously discussed blatant oversight on lack of beneficiary name during bank transfer.

Jho used an ingenious trick which was to create shell companies with names that were very similar to the real beneficiaries. So it would be like 1MDB Investment Corp Ltd, which have nothing to do with the real 1MDB because the actual entity was 1Malaysia Development Berhad Ltd. Okay, I simply created these names without referring back to the book. But you get the idea.

The book introduced half a dozen of these examples used by Jho Low to wire money illegal to himself or his cronies. This allowed him to siphoned off a few billion dollars from Malaysia. He used the money to party, buy luxury yacht and financed his crazy lifestyle.

Google screenshot of Jho's various party photos

There are two lessons here: always double check when names are similar but not a 100% match and when there is something fishy, make sure we figure the whole damn thing out. The second lesson is that we cannot rely others to do the checks. The 1MDB saga showed that a lot of international wire transfers are simply done unchecked or even if checks were done and questions were asked, those not involved tend to let things slip through. So it ties back to the point made in the previous post. When there is no oversight, then chances are that things will go wrong.

Here's the summary of the three financial lessons:

1. Be careful when there is no transparency
2. Be very vigilant when there is a lack of independent oversight
3. Look out for the small discrepancies and figure things out when the parts doesn't gel

The life lessons from Billion Dollar Whale were more interesting, in my opinion. It is also related to what Warren Buffett referred to as people's inner scorecard as opposed to outer scorecards. According to the book, Jho Low lived by other people's scorecards of himself. It was this desire to prove himself that led him down the dark path. Well, that's Billion Dollar Whale's authors interpretation, we will never know for sure, but it's important to understand this scorecard concept.

People who live by how others score them will forever be chasing other people's dreams. Outer scorecard matters, if someone whom you trust and respect gives a realistic scorecard of you and would like you to improve. It then helps to compare our own inner scorecards to these important outer scorecards. So not all outer scorecards are bad, but when all outer scorecards matter more than inner scorecards, then the balance is upset and things can go wrong. 

In the book, Jho Low was being describe as an Asian boy who wasn't in this place during his school years in UK's top elite schools. This planted the seed of desire to prove himself and impress others. He wanted it so badly to the extent that he borrowed his friend's bungalow and put his own family photos to trick visitors that the big house was his. There were other episodes mentioned to put forth the story as well. If true, then Jho Low's story really is the cautionary tale to remind ourselves how living by outer scorecards can screw up everything.

His balance was totally upset. 

The other big life lesson was how Jho Low failed to get himself out of trouble when he had the chance. This was at the time of the so-called "third heist" of USD 3 billion dollars which Goldman Sachs helped 1MDB raised by selling bonds to gullible investors. After jumping several hoops and hurdles, this ridiculously went through all the checks and Jho Low got the money. All 3,000,000,000 US dollars! At that point, he could have used part of the 3 billion to plug his previous holes, which amounted to a billion or so (if I recall correctly). That way, he could have bought time to finally invest and claw back his losses. But he didn't and spent it on luxury yacht, pointless stuff and parties again. So here's the last lesson.

Once we do something wrong, it is very hard to turn back from black to white. It's a slippery slope down, like joining the dark side. Jho Low couldn't stop himself. It was akin to an addiction. Once you crossed the line, your mind tells you just keep going. It's been crossed, no point turning back. I stole a billion, why not steal three? Who's counting anyways? It takes a lot to redeem oneself. It is also very difficult for people from the other side to help. It is almost has to be one's own journey back. We have real life, fictional and historical examples of this: Benny Teo, founder of 18 Chef in Singapore, Darth Vader and St Paul from the Bible. Yes, only one real life example. Such redemptions are truly far and few in between.

So, don't cross the line. 

Circuit Breaker Ending! Huat Ah!

Thursday, May 14, 2020

Charts #31: Asian startups

Here's a dated chart from WSJ. The startup boom ended with the arrival of the coronavirus. Let's see how many will still be around in 18 months.

Grab has come a long way. Hopefully it will be fairy tale ending with rainbows for this ASEAN unicorn. Huat Ah!

Monday, May 04, 2020

Book #8: Billion Dollar Whale's Fraud Detection Lessons

Billion Dollar Whale was published in 2018 and updated in 2019 tells the story of Jho Low and the 1MDB heist in full details. Jho Low was the mastermind (even though he denied it) behind stealing billions of dollars from Malaysians. When the scandal broke out, it brought down Najib in the 2018 elections, in effect, ending UMNO's 61 year rule in Malaysia, our truly Asian neighbour.

Alongside Bad Blood, these two books provided detail descriptions of the financial bag of tricks and things to watch out for in fraud cases. It is worth jotting them down for future references. For me, here's the three warning signs:

1. Lack of transparency and out-of the-norm obsession with secrecy
2. Lack of independent oversight
3. Slight discrepancy in names of bank accounts and incorporate entities

1. Lack of transparency

In both stories, the perpetrators used secrecy as the main reason to put people off track. Theranos constantly site its need for maintain top secrecy because the firm had to take precaution against competitors who might steal their technology. They refused visits to their labs and keep a tight check on its employees to make sure nothing was ever leaked. In reality, there was no proprietary technology, it was all about hiding the scam. In Jho Low's case, he used the authority of the Malaysia's Prime Minister (Najib) and his sovereign wealth fund to fend off the need for transparency.

Without transparency, it is easy to cook anything. As such, investors must always be extra vigilant when companies or organizations use all sorts of excuses to mask transparency. In today's connected world, it is no longer possible to hide anything. You can only go only as far as common sense allows. When a company sue ex-employees for divulging secrets (Theranos' case) or when bank transfer is asked for accounts with no beneficiary's names (Jho Low's case), warning signs are all over. 

2. Lack of independent oversight

Every company has a board of directors. The board has a say in many things including firing the CEO and is accountable to shareholders. Singapore companies like to publish the faces of board members as it is an accomplishment for someone to be a board member of a prominent company. DBS' board webpage is decorated as such (see below).

The board usually made up of both insiders and outsiders. Sometimes, the board has a non-executive Chairperson. This means that the Chairperson is not a complete insider. In other cases, the founder or the past CEOs become the Chairperson. The Chairperson is very important as he is ultimately responsible for the board and thus the company or entity in question.

So when 1MDB first Chairman resigned in 2009. It was a big warning sign. Unfortunately, in our busy, mobile phone addicted world today. Nobody would notice anything if it's not flagged out. It was the same situation with Theranos when multiple board directors resigned as they kept hearing uncomfortable news from outer sources. The bombshell was dropped on Theranos when Henry Kissinger resigned. As such, resignation of prominent external parties is something to look out for.

There are cases whereby the board was already stuffed with conspirators in the first place. This was what happened in 1MDB after the first Chairman resigned. In many small companies, nobody wants to be on the board in the first place. So, naturally, only friends or friendly acquaintances would join the board. This is one reason why mid and small caps are not comparable to large, blue chips companies. The board is the minority investors' last line of defense. If they are conspirators of fraudster CEOs and founders, then there is little hope to see our money.

The other big independent entity is the auditor. The auditor's report is an important piece of document to pick up nuances as highlighted in Billion Dollar Whale. 1MDB rotated through 3 of the big four auditors with most of them highlighting concerns that were crafted into the auditor's report. The thing to look out for would be a disclaimer of opinion or an adverse opinion. A disclaimer of opinion means that the auditor chose not to provide an opinion of the company. 

An adverse opinion means that the auditor found something wrong in the financials but does not have enough evidence to express that opinion. When this happens, regulators would have to step in. As such, both disclaimer of opinion and adverse opinion would usually not happen in writing so what happened at 1MDB was continuous delay in finalizing the accounts as well as change of auditors within a short period of time.

This would be another major warning sign. In the next instalment, we would discuss discrepancy in names as well as other lessons. Stay tuned!

Happy Star Wars Day! May the Force be with You!