Hong Kong slaps a record fine of US$350 million on Goldman Sachs' Asia unit for its role in underwriting 1MDB's bond sales

Enoch Yiu enoch.yiu@scmp.com
·6-min read

Goldman Sachs (Asia), the regional unit of the US investment bank, has been slapped with the highest fine ever imposed by Hong Kong's Securities and Futures Commission (SFC) for its role in a financial scandal that stretched to Hollywood from Southeast Asia, and toppled a government in Malaysia.

The Hong Kong-based unit of the Wall Street bank was fined US$350 million due to the "serious lapses and deficiencies in its management supervisory, risk, compliance and anti-money-laundering controls that contributed to the misappropriation of US$2.6 billion" from three bond offerings in 2012 and 2013 that raised US$6.5 billion for 1Malaysia Development Berhad (1MDB), the SFC said in a statement.

Goldman Sachs (Asia) in Hong Kong had significant involvement in the origination, approval, execution and sales process of the three 1MDB bond offerings, the SFC said. The Wall Street bank received US$581.5 million in fees from 1MDB, inclusive of US$567 million in commission from the three bond sales.

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Its Hong Kong unit alone collected US$210 million, or 37 per cent of the total fees from the debt sales, the largest chunk among various Goldman Sachs entities.

The US bank lacked adequate controls in place to monitor staff and detect misconduct in its day-to-day operations, 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.

The bank, which settled the criminal proceedings with the Malaysian government in August for US$2.5 billion plus a US$1.4 billion guarantee, would issue a statement soon, according to a spokesman.

"This enforcement action is the result of a rigorous, independent investigation conducted by the SFC into whether Goldman Sachs (Asia)'s involvement with 1MDB in 2012 and 2013 contravened the standards expected of firms under Hong Kong regulations," said Ashley Alder, the SFC's chief executive.

"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," Alder said.

"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."

Former Malaysian Prime Minister Najib Razak (C) speaking to the media on July 28, 2020. Najib, who was defeated in a general election in 2018, was sentenced to 12 years in jail and fined 210 million ringgit (US$50.6 million) after being found guilty on seven counts of money laundering, criminal breach of trust and abuse of power in relation to the 1MDB scandal. Photo: Xinhua alt=Former Malaysian Prime Minister Najib Razak (C) speaking to the media on July 28, 2020. Najib, who was defeated in a general election in 2018, was sentenced to 12 years in jail and fined 210 million ringgit (US$50.6 million) after being found guilty on seven counts of money laundering, criminal breach of trust and abuse of power in relation to the 1MDB scandal. Photo: Xinhua

The SFC in July last year banned former Goldman Sachs (Asia) partner Tim Leissner from working as a securities and financial adviser in the city for life, in relation to the 1MDB corruption scandal. Leissner pleaded guilty in August 2018 to criminal charges brought against him by the US Department of Justice for money laundering and corruption.

Leissner admitted that he had conspired with fugitive Malaysian financier Low Taek Jho, also known as Jho Low, and others to pay bribes and kickbacks to Malaysian and Abu Dhabi officials, to obtain business from 1MDB for Goldman Sachs, including the bond offerings, the SFC statement said on Thursday.

According to the Department of Justice, US$4.5 billion was siphoned from 1MDB between 2009 and 2014, a period in which Leissner was licensed by the SFC.

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The stolen money was used to buy everything from paintings by Van Gogh and Monet to a custom-built yacht. The 91.5-metre (300-foot) superyacht, seized by the Malaysian government and subsequently sold to one of Malaysia's richest men for half its purchase price, was renamed Tranquility and is now available for charter for US$1.25 million a week.

Some of the cash pilfered from 1MDB also made it to Hollywood, helping to the 2014 movie The Wolf of Wall Street, which earned actor Leonardo DiCaprio a Golden Globe for his performance as the stock-market scammer Jordan Belfort. Low was listed in the movie's end credits with special thanks.

Some assets have been returned. Indonesia in February 2018 seized a luxury yacht on the island of Bali linked to 1MDB and Low. Australian model and actress Miranda Kerr handed over jewellery worth millions of dollars that US authorities said was given to her by Low, including a jewellery set gifted to her.

Leonardo DiCaprio in "The Wolf Of Wall Street". Photo: Handout alt=Leonardo DiCaprio in "The Wolf Of Wall Street". Photo: Handout

DiCaprio also returned to authorities an Oscar statuette once owned by actor Marlon Brando and other items the US authorities said were funded by 1MDB money.

Many red flags were raised on the three bond offerings by 1MDB related to money laundering and bribery risks, signs that the Wall Street bank failed to "critically examine", the SFC said.

The revenue Goldman Sachs earned from 1MDB's three bond offerings was more than double the total revenue it generated by acting as an arranger and underwriter in 213 other bond offerings in Asia excluding Japan between 2011 and 2015, the SFC said.

"1MDB's willingness to pay such high fees to Goldman Sachs as sole arranger and underwriter, and the engagement of Goldman Sachs for all three offerings without going through a competitive process should have raised questions about how the business was obtained from 1MDB, the reasonableness of the mandates, and whether the circumstances leading to such business raised any suspicions of bribery or other illicit conduct," the SFC said.

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The SFC's previous highest fine was a HK$400 million (US$51.61 million) penalty levied on Swiss bank UBS last November for overcharging bond trading clients for nearly a decade. That matched a HK$400 million fine levied in November 2017 on HSBC Private Bank for misconduct related to the sale of structured products linked to Lehman Brothers.

While making its decision, the SFC already considered that Goldman Sachs has agreed to settle proceedings with the Malaysian government, while Goldman Sachs (Asia) has accepted its findings and disciplinary action for an early resolution.

Goldman Sachs (Asia) agreed provided the SFC with annual reports prepared by its internal audit function for three consecutive years to show that it had taken remedial measures to address regulatory issues identified by the regulator.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.