The Goldman Sachs Group and its Malaysian subsidiary have admitted to conspiring to break the US Foreign Corrupt Practices Act in connection with the 1Malaysia Development Berhad scandal, which saw many corrupt payments go through private banks. Goldman has now reached a co-ordinated settlement with criminal and civil authorities all over the world.
Goldman Sachs signed a deferred prosecution agreement yesterday with the US Department of Justice in connection with a "criminal information" presented to a federal court in the Eastern District of New York which charged the financial institution with conspiracy to break the anti-bribery provisions of the FCPA. The $2.9 billion consists of both criminal penalties and the 'disgorgement' of ill-gotten gains from the misconduct.
Previously, Tim Leissner, the former Southeast Asia Chairman and participating managing director of Goldman Sachs, pled guilty to conspiring to launder money and to break the FCPA. Ng Chong Hwa, aka “Roger Ng,” former managing director of Goldman and head of investment banking for GS Malaysia, has been charged with conspiring to launder money and to violate the FCPA. He was extradited from Malaysia to face these charges and is scheduled to stand trial next March.
So far, on behalf of Malaysia, the DoJ has recovered (or helped in the recovery of) more than $1 billion in assets that sprang from the 1MDB money laundering and bribery scheme.
Seth DuCharme of the DoJ said: “Over a period of five years, Goldman Sachs participated in a sweeping international corruption scheme, conspiring to avail itself of more than $1.6 billion in bribes to multiple high-level government officials across several countries so that the company could reap hundreds of millions of dollars in fees, all to the detriment of the people of Malaysia and the reputation of American financial institutions operating abroad.”
Goldman admitted yesterday that Leissner, Ng, another employee and others conspired with Low Taek Jho, aka Jho Low, to promise and pay more than $1.6 billion in bribes to Malaysian officials and people who worked at 1MDB, the International Petroleum Investment Company or IPIC, and Aabar Investments PJS. The co-conspirators allegedly paid these bribes using more than $2.7 billion in funds that Low, Leissner, and other members of the conspiracy diverted and misappropriated from the bond offerings underwritten by Goldman Sachs, while also allegedly retaining a portion for themselves. The bank admitted that, through Leissner, Ng, Employee 1 and others, it used Low’s connections to advance and further the bribery operation, ultimately ensuring that 1MDB awarded Goldman a part in three bond transactions in 2012-13.
Goldman has also admitted that, although employees serving as part of Goldman’s control functions knew that any transaction involving Low posed a significant risk, and although they were on notice that Low was involved in the transactions, they did not take reasonable steps to ensure that Low was not involved.
In the United Kingdom, the Financial Conduct Authority and the Prudential Regulation Authority have each fined the Goldman Group a relatively miniscule £48,308,400 (U$63 million).
The FCA has fined the group for breaking two of its so-called Principles for Business. Principle 2 required it to do business with due skill, care and diligence. Principle 3 required it to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems. The transgressions took place between 1 February 2012 and 3 February 2016.
The PRA, meanwhile, says that Goldman contravened Fundamental Rule 2 (and, before 19 June 2014, Principle 2 of the Principles for Business; Principle 3 of the Principles for Businesses; and rule SYSC 9.1.1 R of the old Financial Services Authority's Senior Management Arrangement, Systems and Controls sourcebook. The transgressions took place between 1 February 2012 and 30 May 2013 and between 1 October 2015 and 3 February 2016.
The payer of both fines is Goldman Sachs International, an investment banking, securities and investment management firm headquartered in London. It qualified for a 30% discount on both fines.
Breach of Principle 2
Goldman Sachs International’s dereliction of Principle 2 fall into three categories.
First, it did not assess and manage the risk arising from the involvement of an unnamed third-party individual (the FCA calls him Third Party A) in the 1MDB bond transactions at all well. Prior to those transactions, Goldman Sachs had already rejected him as a client, partly because it could not verify the source of his wealth. The bank, moreover, relied too heavily on statements by its deal team to the effect that he had no involvement in 1MDB, despite the fact that a senior member of the deal team had provided the compliance office with inconsistent accounts about the extent of his involvement in the first 1MDB bond transaction. The risk of A’s involvement was not raised in the documents that went before the committees that had the job of assessing the 1MDB transactions. In fact he had links to high-ranking people in 1MDB and two Malaysian sovereign wealth funds. The deal team, incidentally, was based mainly in Asia. It originated the 1MDB transactions and did the day-to-day work behind their execution.
Second, Goldman fell short when considering the risks arising in each of the 1MDB transactions, which it should have done both one-by-one and holistically. The committees received incomplete reports.
Third, it failed to deal properly with allegations of bribery and misconduct. According to its own internal policies, it ought to have 'escalated' some evidence of bribery that it received in mid-2013, although the FCA does not say to whom.
The bank failed to follow Principle 3 because it failed to keep appropriate records of its handling of risks that arose from the three bond transactions.
The view from Hong Kong
Meanwhile, the Securities and Futures Commission of Hong Kong has reprimanded and fined Goldman Sachs (Asia) LLC US$350 million (HK$2.71 billion) for serious lapses and deficiencies in its supervisory, risk-related, compliance-related and anti-money-laundering controls that contributed to the misappropriation of US$2.6 billion from the US$6.5 billion that 1MDB raised in the three bond offerings.
The SFC blames Goldman for failing to act properly in respect of numerous 'red flags' which cast the commercial rationale of the bond offerings into doubt and contained serious signs of money laundering and bribery. Various regional and firm-wide committees at Goldman Sachs did not examine them critically enough. They included the following.
- Despite being in a weak financial position with questionable ability to service existing debts, 1MDB raised US$6.5 billion within a short period of 10 months but the amounts raised far exceeded its actual needs. Less than 50% of the funds raised in the first two bond offerings were intended to be used for the acquisition of power assets. In just four months after the second offering, 1MDB raised another US$3 billion to finance a joint venture that did not yet have concrete investment plans. At that time, more than US$1.6 billion of the proceeds from the first two transactions had still not been used.
- Goldman Sachs received around US$581.5 million in fees from 1MDB, about 9% of the funds raised in these offerings. The revenue that it earnt from these three offerings alone was more than double the total revenue that it derived from acting as an arranger and/or underwriter in 213 other Asia ex-Japan bond offerings in the five years between 2011 and 2015.
- 1MDB’s willingness to pay such high fees to Goldman Sachs as its sole arranger and underwriter, and the engagement of Goldman Sachs for all three offerings without a competitive tendering process, should have raised questions at the bank.
- 1MDB’s repeated emphasis on confidentiality and speedy execution and its use of foreign private banks rather than Malaysian commercial banks to deposit the bond proceeds are other 'red flags' that Goldman should have seen.
- In the course of reviewing the bond offerings, Goldman Sachs Asia had found plenty of negative media reports which associated 1MDB with "high corruption risks," in the SFC's phrase.
The SFC therefore states that Goldman Sachs has broken the following rules.
- General Principle 2 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, which requires due skill, care and diligence.
- Paragraph 4.2 of the code, by which it should have devoted adequate resources to supervision.
- Paragraph 4.3 of the code, which requires it to have good internal control procedures.
- Section 23(b) Schedule 2 Anti-Money Laundering and Counter-Terrorist Financing Ordinance and paragraph 2.1 of the Guideline on Anti-Money Laundering and Counter-Terrorist Financing.
The SFC also thinks that Goldman's senior managers failed to comply with General Principle 9 and paragraph 14.1 of the code. It justifies its decision to impose a hefty fine by insisting that "a strong message needs to be sent."
Earlier action in Malaysia
Goldman Sachs International, Goldman Sachs Asia and Goldman Sachs (Singapore) PTE were charged in Malaysia for the crime of making false and misleading statements in the offering documents for the bond offerings. In August, the banking giant settled these proceedings with the Malaysian Government for US$2.5 billion plus a US$1.4 billion guarantee.
Slow progress in Switzerland and Singapore
Meanwhile, the Swiss financial regulator has just stated that BSI, the Swiss private bank whose unit in Singapore had to close in 2016 at the behest of the Monetary Authority of Singapore, ought to have been compelled to 'disgorge' only SFr70 million in relation to 1MDB instead of the SFr90 million that FINMA tried to charge it at the time. The bank disputed FINMA's decision in 2016 and a court upheld its objection last year. FINMA has finally embraced the ruling.
The MAS has also just issued a lifetime prohibition order against Mr Kevin Michael Swampillai, a former representative and head of the Wealth Management Services Department of BSI when it operated in Singapore, for his part in the scandal.