Former Malaysian Prime Minister Najib Razak was arrested Tuesday in connection with a multibillion-dollar financial scandal at the heart of his government.
Mr. Najib quashed an investigation into the scandal when it exploded three years ago. But he is no longer able to dictate events after being cast from office in a stunning election loss in May, and Malaysia’s new rulers are eager to unearth what went on at troubled state investment fund 1Malaysia Development Bhd., or 1MDB.
U.S. authorities say Mr. Najib’s flamboyant wife, Rosmah Mansor, obtained tens of millions of dollars in diamonds bought with 1MDB funds. There was no immediate word from Malaysian authorities on whether she was also facing arrest.
Mr. Najib was arrested at his Kuala Lumpur mansion, according to the special anticorruption task force set up to investigate the 1MDB affair, which said in a statement that the former leader would be charged in court Wednesday morning. The investigators didn’t specify what charges he would face.
Mr. Najib and his wife have denied wrongdoing. Mr. Najib’s lawyers couldn’t be reached immediately for comment, and his spokesman didn’t respond immediately to a request for comment.
A surprising election defeat in May stripped Mr. Najib of his ability to block investigations in Malaysia into what international prosecutors allege is one of the largest financial frauds of all time.
In July 2015, when the outlines of the 1MDB scandal began to emerge, Mr. Najib tried to shut down the probe, according to people with direct knowledge of the matter. He fired Malaysia’s attorney general, who was seeking the prime minister’s arrest over allegations, first reported in The Wall Street Journal, that he received hundreds of millions of dollars from 1MDB into his personal bank accounts. The government suspended the license of a newspaper that had led reporting on the case and detained scores of critics.
Over the past three years, authorities in the U.S., Singapore and Switzerland continued to investigate the 1MDB scandal. The U.S. Justice Department alleges in civil lawsuits that $4.5 billion was taken from the fund and used to buy mansions, a yacht and to fund a Hollywood production company.
But Malaysia’s probe, led by an anticorruption commission, was mothballed, and overseas investigators complained that Malaysia dragged its feet in assisting them.
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The country’s new leader, Prime Minister Mahathir Mohamad, has moved quickly since coming to power in May to restart the probes at home.
The arrest of Mr. Najib is just the starting point of an investigation that Mr. Mahathir says will take months to complete and focus on the roles of scores of people. The new government has barred a number of former government officials from leaving the country.
In particular, investigators are homing in on Jho Low, a Malaysian financier close to Mr. Najib who U.S. Justice Department lawsuits allege was the ringleader behind the purported theft of money from 1MDB. Mr. Najib gave Mr. Low wide latitude to run the fund’s affairs, say people who worked there.
“He has a lot of information, particularly information with regard to where the money is,” Mr. Mahathir said in a recent interview. “He would be a good witness.”
Malaysian investigative documents allege that Mr. Najib used 1MDB money to finance the campaigns of ruling-party candidates in the 2013 elections. U.S. officials also say proceeds from the fund went to buy jewels for Ms. Rosmah and mansions for her son, a friend of Mr. Low. The son, Riza Aziz, has said he didn’t know the money was from 1MDB. In the past, Ms. Rosmah has described criticism of her spending as politically motivated.
Mr. Low previously offered to provide information about Mr. Najib and 1MDB in return for immunity from criminal prosecution, but Mr. Mahathir turned him down, according to people familiar with the proposed deal. Malaysian authorities have issued a warrant for Mr. Low’s arrest, Mr. Mahathir said last month.
Mr. Low couldn’t be reached for comment. He previously has denied any wrongdoing, and his lawyers have said he has instructed them to cooperate with investigators. He is believed to be in China.
The U.S. Justice Department, via its civil lawsuits, is attempting to seize almost $2 billion in assets allegedly bought with 1MDB money. However, in August, the department asked a U.S. judge to suspend those cases while it focused on building a criminal investigation into 1MDB, which people familiar with the matter say is focusing on Mr. Low.
Mr. Najib launched the 1MDB fund in 2009 as a way to spur investment in Malaysia, but it quickly racked up debts that now stand at $8 billion. Much of the money was raised via international bond issuances sold by Goldman Sachs Group Inc., which earned hundreds of millions of dollars. The bank has defended its profits as commensurate with the risk involved.
The specific part of the inquiry that led to Mr. Najib’s arrest on Tuesday revolves around how some $10.5 million, allegedly from a former 1MDB unit, made its way into his personal bank account. The unit, SRC International, was established in 2011 as the fund’s vehicle for overseas energy investments. It was placed under the Finance Ministry’s control in 2012. Mr. Najib has acknowledged that the money went into his account but hasn’t provided an accounting of where it came from.
The allegations against Mr. Najib cover a fraction of the amount he is alleged to have received from the fund.
The Justice Department lawsuits separately allege that the former prime minister received $681 million from 1MDB into his personal accounts.
As he was battling for his political life in 2015, Mr. Najib appointed a new attorney general who said that the $681 million was a political donation from a Saudi royal that was later returned. He cleared Mr. Najib of wrongdoing.
Over the ensuing three years, Malaysian opposition politicians and human rights groups complained about an erosion of civil liberties in the country. Even Mr. Najib’s brother, Nazir Razak, a Malaysian banker, warned on social media that the country’s institutions were being undermined.
Ahead of the May elections, Mr. Najib’s government redrew electoral boundaries to favor the ruling party and enacted a “fake news” law that permitted authorities to jail critics for up to six years.
On election night, as it became evident that Malaysian voters had tossed his party from power, Mr. Najib was in shock as he gathered with his family and close aides, according to a person who was present.
Some members of his entourage urged Mr. Najib to ignore the election results and attempt to lure opposition lawmakers to his coalition, the person said. But Mr. Najib’s family counseled him to step aside gracefully, given that his National Front coalition had won only 79 seats in the 222-seat parliament.
With Malaysia’s democracy on a precipice, Mr. Najib ultimately decided against using force to stay in power.
—Bradley Hope and James Hookway contributed to this article.
Write to Tom Wright at tom.wright@wsj.com and Yantoultra Ngui at yantoultra.ngui@wsj.com
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