Goldman Sachs to pay fines and disgorge profits more than US$2.9 bil in total
Goldman Sachs will pay Singapore US$122 million to settle its role arranging US$6.5 billion worth of bonds for the scandal-plagued 1MDB, said the Attorney-General’s Chambers; Commercial Affairs Department and the Monetary Authority of Singapore in a joint statement on Oct 23.
In addition, Goldman Sachs (Singapore) Pte will disgorge US$61 million to Malaysia. This amount is equivalent to the share of fees it earned from arranging the bonds on behalf of the former Malaysian sovereign wealth fund between 2012 and 2013, among other Goldman Sachs units involved.
The settlement to be paid by Goldman Sachs is part of a US$2.3 billion global resolution between the top US investment bank and various jurisdictions under a deferred prosecution agreement. Including the disgorgement required of Goldman Sachs, that’s a total financial hit of more than US$2.9 billion.
Earlier this year, Goldman Sachs had settled with Malaysian authorities for $3.9 billion. Goldman Sach’s total penalty is approximately equivalent to the total 1MDB bond proceeds raised.
Besides the U$122 million, CAD has served a 36-month conditional warning on Goldman Sachs Singapore in lieu of prosecution for three counts of corruption offences punishable under the Prevention of Corruption Act.
MAS, meanwhile, has directed Goldman Sachs Singapore to appoint an independent external party to conduct a review of its remedial measures.
Magnolia, Maximus and Catalyze
Between 2012 and 2013, Goldman Sachs helped raise some US$6.5 billion via three separate bond issues on behalf of Malaysia’s 1MDB.
From these three issues, which were given the codenames “Project Magnolia”; “Project Maximus” and “Project Catalyze”, some US$2.6 billion of the money was creamed off by individuals such as Low Taek Jho, who used the proceed to buy yachts, jets, paintings, apartments and jewellery.
For its trouble, Goldman Sachs collected fees amounting to US$581.5 million in fees, equivalent to an unusually high percentage of 9% of the funds raised in such offerings.
The revenue Goldman Sachs earned from these three offerings alone was more than double the total revenue it generated from acting as an arranger and, or underwriter in 213 other Asia ex-Japan bond offerings in the five years between 2011 and 2015.
For his role in the saga, former Malaysian prime minister Najib Razak has been convicted and sentenced to a 12-year jail term. He is appealing. Low, alleged mastermind of the fund flows, has reached a civil settlement in the US. He is known to be wanted by both Malaysian and Singapore authorities.
Singapore’s action announced on Goldman Sachs on Oct 23 wasn’t the first related to 1MDB. Back in Dec 2018, MAS imposed a life-long ban on former Goldman chairman for southeast Asia Tim Leissner from the Singapore financial industry. Leissner, together with his colleague Roger Ng, helped to raise funds for 1MDB.
In August 2018, Leissner pleaded guilty in the US for violating the Foreign Corrupt Practices Act, and for conspiracy to commit money laundering.
Low told Leissner and Ng that some of the proceeds from the 1MDB bonds would be paid as kickbacks and bribes to certain Malaysian and Abu Dhabi officials. Leissner admitted to retaining some of these diverted funds for himself.
Acting assistant attorney general Brian C. Rabbitt of the US Justice Department’s Criminal Division said that Goldman Sachs has accepted responsibility for its role in a conspiracy to bribe high-ranking foreign officials to obtain lucrative underwriting and other business relating to 1MDB.
“Today’s resolution, which requires Goldman Sachs to admit wrongdoing and pay nearly three billion dollars in penalties, fines, and disgorgement, holds the bank accountable for this criminal scheme and demonstrates the department’s continuing commitment to combatting corruption and protecting the US financial system,” he added.
A peculiarity of the legal system, specifically the deferred prosecution agreements, allows for companies to pay hefty sums of money to settle misdeeds without admitting guilt.
However, in what is a first for Goldman Sachs, its Malaysian subsidiary pleaded guilty in a US court for violating the Foreign Corrupt Practices Act. It was connected to a scheme to pay more than US$1 billion in bribes to Malaysian and Abu Dhabi officials to obtain lucrative business for Goldman Sachs.
Hong Kong reprimands
Separately, Hong Kong’s Securities and Futures Commission (SFC) has slapped a fine of US$350 million on Goldman Sachs (Asia) for its 1MDB roles.
SFC has reprimanded Goldman Sachs for serious lapses and deficiencies in its management supervisory, risk, compliance and anti-money laundering controls that contributed to the misappropriation of money from 1MBD.
SFC notes that while the 1MDB bond offerings were arranged and underwritten by Goldman Sachs International, the actual work was conducted by deal team members in multiple jurisdictions, and revenue generated from the transactions was shared among Goldman Sachs entities in different jurisdictions.
In particular, Goldman Sachs Asia, the compliance and control hub of Goldman Sachs in Asia based in Hong Kong, had significant involvement in the origination, approval, execution and sales process of the three 1MDB bond offerings. It collected more than a third of the total fees earned.
“The SFC considers that Goldman Sachs Asia lacked adequate controls in place to monitor staff and detect misconduct in its day-to-day operation, and allowed the 1MDB bond offerings to proceed when numerous red flags surrounding the offerings had not been properly scrutinised and satisfactory answers to such red flags had not been obtained,” said the SFC.
SFC’s actions run in parallel to the global resolution that includes US and Singapore. “The penalty in this case – assessed solely in accordance with Hong Kong’s own fining framework – reflects our findings that Goldman Sachs Asia failed to deal properly with numerous suspicious circumstances surrounding the 1MDB bond offerings,” said Ashley Alder, SFC’s CEO.
“These failures led to multiple, serious breaches of the rules which set out the high standards of behaviour expected of all firms supervised by the SFC,” he added.
Despite the latest developments, the dust has not settled on the 1MDB saga. “This case represents the largest ever penalty paid to US authorities in an FCPA case. Our investigation into the looting of funds from 1MDB remains ongoing,” said assistant director in charge William F. Sweeney Jr. of the FBI’s New York Field Office.
Amid wider changes in Malaysia’s political scene, the outcome of Najib’s appeal at this point in time is also uncertain.
In a separate but related announcement, MAS has issued a lifetime prohibition on Kevin Michael Swampillai, former head of wealth management at defunct BSI Bank, used by 1MDB mastermind Low Taek Jho to engineer the fund flows.
Swampillai was a prosecution witness at the 2016 - 2017 trial of his former BSI colleague Yeo Jiawei, the first person to be convicted in relation to 1MDB. According to MAS, Swampillai, while servicing Low with Yeo, creamed off US$5 million in “secret profits” from BSI.
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