As highlighted in this prior post, in November 2018 the DOJ announced criminal charges against former Goldman Sachs employees Roger Ng and Tim Leissner, and Low Taek Jho (Jho Low – an individual “known to be close to various high-ranking officials in Malaysia and Abu Dhabi” who “worked as an intermediary in related to 1MDB and other foreign government officials on numerous financial transactions and projects involving Goldman and others) for paying bribes to various Malaysian and Abu Dhabi officials in connection with 1Malaysia Development Berhad (1MDB), Malaysia’s state-owned and state-controlled investment development company.
This prior post asked: what does this mean for Goldman Sachs?
We now know the answer as the DOJ and SEC announced (here and here) a net $1.66 billion FCPA enforcement action against Goldman Sachs and a related entity. This represents the largest FCPA enforcement action of all-time (see here for the prior top ten list).
As highlighted below, the FCPA enforcement action involved:
(i) a DOJ component (a criminal information against The Goldman Sachs Group charging conspiracy to violate the FCPA’s anti-bribery provisions resolved through a deferred prosecution agreement and a criminal information against Goldman Sachs (Malaysia) Sdn. Bhd. (a wholly-owned subsidiary and agent of Goldman) charging conspiracy to violate the FCPA’s anti-bribery provisions resolved through a plea agreement) in which Goldman will actually pay $1.263 billion; and
(ii) an SEC component (an administrative action against The Goldman Sachs Group finding violations of the FCPA’s anti-bribery, book and records and internal controls provisions) in which Goldman will actually pay $400 million.
Even though the culpable individuals previously charged circumvented Goldman’s controls and otherwise lied to various control personnel, Goldman was nevertheless held liable because “it did not take reasonable steps to ensure that Low was not involved” in various deals and additionally because it “ignored or only nominally addressed” various red flags associated with certain deals. Among other things, the government faulted Goldman for not engaging “in electronic surveillance of Leissner’s correspondence or activities to determine whether Low was involved” in certain deals.
DOJ
As alleged in this criminal information against Goldman:
“In or about and between 2009 and 2014, Goldman, through certain of its agents and employees, including the defendant GOLDMAN SACHS, together with others, knowingly and willfully conspired and agreed with others to corruptly provide payments and things of value to, or for the benefit of, foreign officials and their relatives to induce those foreign officials to influence the decisions of 1MDB, IPIC [International Petroelum Investment Company – an investment fund wholly owned by the Government of Abu Dhabi] and Aabar [Aabar Investments PJS – a private joint stock company and subsidiary of IPIC that is alleged to be an instrumentality of a foreign government] to obtain and retain business for Goldman, including positions as an advisor to 1MDB on the acquisitions of Malaysian energy assets, underwriter of the 1MDB bonds, and underwriter of certain other 1MDB business, including the contemplated initial public offering (“IPO”) of 1MDB’s Malaysian energy assets. Leissner, Ng and Employee 1 [a Participating Managing Director who held various leadership positions in Goldman’s Asia operations] used Low’s connections within the Governments of Malaysia and Abu Dhabi to obtain and retain this and other business for Goldman and, in turn, concealed Low’s involvement in the deals from certain employees and agents of Goldman. In total, Goldman conspired to provide approximately $1.6077 billion to, or for the benefit of, foreign officials and their relatives, of which approximately $18.1 million was paid from accounts controlled by Leissner.
The bribes resulted in Goldman being engaged on, among other projects, three bond offerings that were related to 1MDB’s energy acquisitions and that raised a total of approximately $6.5 billion for 1MDB in 2012 and 2013. The bribes were also intended to help Goldman secure a role on the anticipated IPO of those energy assets. These three bond offerings and a related acquisition, along with a transaction involving Low and IPIC, ultimately earned Goldman in excess of $600 million in fees and revenue across its divisions, and increased Goldman’s stature in Southeast Asia. In the course of this scheme, payments and communications made in furtherance of the scheme were made via wires that passed through the Eastern District of New York.
Pursuant to Goldman’s internal accounting controls, each 1MDB bond transaction required Goldman management’s general and specific authorization. Moreover, because Goldman initially purchased the full value of each bond from 1MDB using Goldman’s assets, the transactions needed to be appropriately authorized and properly recorded. Among other things, Goldman’s internal accounting controls included the Firmwide Capital Committee (“FWCC”), which was authorized by Goldman’s Chief Executive Officer to provide global oversight and approval of bond transactions, including those transactions in which Goldman used its own assets to purchase the financial instruments, like the 1MDB bonds. Goldman’s internal accounting controls also included approval of the bonds by Goldman’s Business Intelligence Group (“BIG”) and compliance, both of which were represented on the FWCC. While certain of Goldman’s employees and agents, including Leissner, Ng and Employee 1, circumvented these and other controls, other Goldman employees and agents who were responsible for implementing its internal accounting controls failed to do so in connection with the 1MDB bond deals. Specifically, 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 he was involved in the transactions, they did not take reasonable steps to ensure that Low was not involved. Additionally, there were significant red flags raised during the due diligence process and afterward, including, but not limited to, Low’s involvement in the deals, that were either ignored or only nominally addressed so that the transactions would be approved and Goldman could continue to do business with 1MDB.”
Under the heading “Goldman’s Relationship with Low” the information alleges:
“In or about 2009, Leissner and Ng were introduced to Low, who was known to be close to various high-ranking officials in Malaysia and Abu Dhabi, and through Low began cultivating relationships with Malaysian Official 1 and others to secure business for Goldman.
In or about January 2009, Leissner and Ng discussed with Low and others a role for Goldman in the creation of and potential fundraising for Terengganu Investment Authority (“TIA”), 1MDB’s predecessor entity.
Leissner and Ng also attempted to onboard Low as a Goldman client, or otherwise work with Low, on numerous occasions in or about and between 2009 and 2013. For example, in or about September 2009, Ng referred Low for a private wealth management account (“PWM”) through a Goldman European subsidiary. Ng described Low as “our partner in a lot of transactions in [M]alaysia. Largely the mid-east and [M]alaysia rationship [sic].” As part of the onboarding process, Goldman’s control functions, including BIG, vetted Low’s finances and raised questions about his source of wealth. As control functions personnel worked to diligence those questions about Low, the business side continued to pressure them to approve Low as a client. In a March 13, 2010 email, a Goldman regional head of compliance wrote to a high-level BIG executive and others, expressing frustration with the pressure to approve Low and underscoring the red flags Low raised as a client. […]
Ultimately, BIG personnel rejected Low as a Goldman client because of his inability to satisfactorily answer questions raised by Goldman’s control functions, as well as negative news coverage about Low’s lavish spending. Notwithstanding this rejection, there were additional attempts to onboard Low and his companies as a Goldman client.
For example, in early 2011, Leissner tried to onboard two of Low’s companies as clients of Goldman but was unable to do so due to compliance’s continued objections to Low.
Around the same time, Leissner made an additional attempt to bring Low on as a PWM client through Goldman’s Singapore office, without referencing the prior attempt. Low was again denied due to, among other things, his questionable source of wealth. In a March 11, 2011 email chain discussing the attempt, a high-ranking employee in compliance and MD noted, “To be clear, we have pretty much zero appetite for a relationship with this individual,” and a high-ranking employee in BIG and MD expressed, “this is a name to be avoided.”
Nevertheless, the information alleges:
“Even after the control functions had rejected Low as a client, Leissner, Ng and others at Goldman continued their relationship with Low and used him to obtain and retain business for Goldman from 1MDB and others. In or about and between 2012 and 2013, Leissner, Ng, Employee 1 and other Goldman employees worked with Low to help 1MDB raise more than $6.5 billion via three separate bond offering transactions, referred to internally at Goldman as “Project Magnolia,” “Project Maximus” and “Project Catalyze,” respectively.”
As to “Project Magnolia,” the information alleges that “although employees within Goldman’s control functions suspected that Low may be involved in the deal, the only step taken by the control functions to investigate that suspicion was to ask members of the deal team whether Low was involved and to accept their denials without reasonable confirmation.” According to the information:
“Goldman’s control functions accepted the statements of the deal team members about Low’s involvement at face value, rather than taking additional steps that Goldman’s control functions took in other deals, such as reviewing the electronic communications of members of the deal team to look for evidence of Low’s involvement (e.g., searching for references to Low). For example, had Goldman conducted a review of Leissner’s electronic communications at this time, it would have discovered multiple messages linking Low to, among others, the bond deal, 1MDB officials, Malaysian Official 1 and Abu Dhabi Official 1, as well as the use of personal email addresses by Leissner and Ng to discuss Goldman business.”
As to Project Maximus, the information alleges that “once again, Goldman’s control functions simply accepted at face value the representations of the deal team members and failed to further investigate Low’s suspected involvement in this bond deal.” The information further alleges: “despite their continued concern, as evidenced by their repeated questions, Goldman’s control functions did not engage in electronic surveillance of Leissner’s correspondence or activities to determine whether Low was involved in the deal.”
As to Project Catalyze, the information alleges:
“Goldman’s control functions had continued suspicions that Low was working on the third bond deal. Once again, however, the control functions relied solely on the deal team members’ denials of Low’s involvement without any further scrutiny. “
In connection with other anticipated 1MDB deals, the information alleges that “Leissner caused approximately $4.1 million to be transferred from an account [controlled by Leissner and close relative] to Jeweler 1 in New York in part to pay for approximately $1.3 million in jewelry that had been purchased in January 2014 by the wife of Malaysian Official 1 while she, Malaysian Official 1 and Low were in the U.S.”
Under the heading “Additional Failures of Goldman’s Control Functions” the information alleges:
“After the bond deals were completed, in or about and between March 2013 and February 2016, additional red flags were raised in the press and on internal phone calls among Goldman’s employees and executives about Low’s involvement in the deals and the possible payment of bribes in connection with the deals. Goldman failed to investigate these red flags or to perform an internal review of its role in the bond deals despite the clear implication that the deals had involved criminal wrongdoing. Further, high ranking employees of Goldman failed to escalate concerns about bribery and other criminal conduct related to the bond deals pursuant to Goldman’s escalation policy, which required that any Goldman employee who became aware of any conduct that could raise, among others, “a legal, compliance, reputational, ethical, accounting, [or] internal accounting control” issue to report such conduct immediately to a supervisor and Goldman’s control functions.”
Under the heading, “Goldman’s Other Low-Related Deals and Contracts,” the information alleges:
“The 1MDB bond deals and underlying acquisitions were not the only Low-related transactions that Goldman engaged in during the relevant period. Despite the negative view that Goldman’s control functions took of Low, there were numerous potential and completed deals with which Low was involved in some manner.
For example, Goldman served as an advisor on a deal in or about 2013 where a Low-related entity was one of the original clients. The deal was not submitted for due diligence review until it was substantially finalized. At that point, BIG raised concerns about the involvement of the Low-related entity and advised the deal team that the deal should not proceed if Low was involved as a client, received a fee or had an active role in the deal. Through his relationship with Abu Dhabi Official 1, Low arranged for another entity to become Goldman’s putative client. However, Low remained in the deal as a co-investor and an active participant. Goldman deal team members knew this was merely a technical change in the deal structure, and knew but did not inform BIG of Low’s continued involvement in the deal. BIG employees were later surprised to see press reports that the deal had been completed with Low’s involvement in late 2013. The deal resulted in a multi-million dollar fee for Goldman. Goldman’s control functions performed no additional review after the deal was completed.
In addition, senior executives at Goldman had continuing contact with Low during the relevant period. These contacts included, but were not limited to, a meeting in or about 2009 between a senior Goldman executive and PMD and Malaysian Official 1 that was arranged by Low; a meeting in or about 2012 that was attended by a Goldman senior executive, Abu Dhabi Official 2 and Low, among others; and a meeting on a yacht in Southern France in or about 2013 attended by another senior Goldman executive and PMD, Leissner, Malaysian Official 1 and Low, among others.”
Based on the above allegations, the information charges Goldman with conspiracy to violate the FCPA’s anti-bribery provisions. The charge was resolved through this three year deferred prosecution agreement.
The DPA was based on the following relevant considerations:
a. the Company did not receive voluntary disclosure credit pursuant to the FCPA Corporate Enforcement Policy in the Department of Justice Manual … or pursuant to the Sentencing Guidelines, because it did not voluntarily and timely self-disclose to the Offices the conduct described in the Statement of Facts;
b. the Company received partial credit for its cooperation with the Offices’ investigation of the underlying conduct, including: collecting and producing voluminous evidence located in other countries; making regular factual presentations and investigative updates to the Offices; and voluntarily making foreign-based employees available for interviews in the United States;
c. the Company did not receive full credit for its cooperation because the Company was significantly delayed in producing relevant evidence, including recorded phone calls in which the Company’s bankers, executives, and control functions personnel discussed allegations of bribery and misconduct relating to the conduct set forth in the Statement of Facts;
d. the Company ultimately provided to the Offices all relevant facts known to it, including information about the individuals involved in the misconduct;
e. the Company’s wholly-owned subsidiary, Goldman Malaysia, is pleading guilty … to one count of conspiracy to violate the anti-bribery provisions of the FCPA;
f. the Company ultimately engaged in remedial measures, including (i) implementing heightened controls and additional procedures and policies relating to electronic surveillance and investigation, due diligence on proposed transactions or clients and the use of third-party intermediaries across business units; and (ii) enhancing anti-corruption training for all management and relevant employees;
g. the Company has committed to continuing to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements set forth in Attachment C to this Agreement (Corporate Compliance Program);
h. based on the Company’s remediation and the state of its compliance program, and the Company’s agreement to report to the Offices as set forth in Attachment D, the Offices determined that an independent compliance monitor is unnecessary;
i. the nature and seriousness of the offense conduct, including, among other things: the amount of bribes; the level and number of the foreign officials bribed; the duration of the scheme; the resulting illicit gains to and increased stature in the region for the Company from the deals, which were significant to the Company and key to the divisions of the Company in which the deals occurred;
j. the pervasiveness of the misconduct within the Company, including that high-level employees within the Company’s investment bank were involved in the misconduct described in the Statement of Facts and others ignored significant red flags;
k. the Company has agreed, concurrent with this resolution, to resolve additional investigations relating to the conduct described in the Statement of Facts, including by entering into a Consent Order with the Board of Governors of the Federal Reserve System (the “the Fed”) pursuant to which it will pay a civil money penalty of $154 million; by settling an Administrative Action filed by the U.S. Securities and Exchange Commission (the “SEC”) and agreeing to pay $606 million in disgorgement and a civil monetary penalty of $400 million; by entering into a Consent Order with the New York State Department of Financial Services (the “DFS”) pursuant to which it will agree to pay a civil money penalty of $150 million; by resolving the United Kingdom Financial Conduct Authority’s and Prudential Regulation Authority’s (the “UK FCA and PRA”) investigations and paying a civil penalty to each of $63 million (for a total of $126 million); by resolving the investigation by the Attorney-General’s Chambers of the Republic of Singapore (the “Singapore AGC”) pursuant to which it will pay $122 million; by resolving the investigation of the Monetary Authority of Singapore (the “Singapore MAS”); by resolving with the Commercial Affairs Department of the Singapore Police Force (the “Singapore CAD”); and by resolving the investigation by the Hong Kong Securities and Futures Commission (the “Hong Kong SFC”) pursuant to which it will pay $350 million;
l. the Company has no prior criminal history; and
m. the Company has agreed to continue to cooperate with the Offices’ ongoing investigation of individuals and other entities …”; and
n. accordingly, after considering (a) through (m) above, the Offices believe that the appropriate resolution in this case is a deferred prosecution agreement with the Company; a criminal monetary penalty of $2,315,088,000, which reflects an aggregate discount of ten (10) percent off of the bottom of the otherwise-applicable Sentencing Guidelines fine range for the FCPA conduct; disgorgement of $606 million; and a guilty plea by Goldman Malaysia.”
The DPA sets forth an advisory Sentencing Guidelines range of $2.57 billion to $5.14 billion and states:
“The Offices and the Company agree, based on the application of the Sentencing Guidelines to the misconduct, that the appropriate disgorgement is $606 million (the “Disgorgement Amount”) and the total monetary penalty is $2,315,088,000 (the “Total Criminal Penalty”), $500,000 of which will be paid as a criminal fine by Goldman Malaysia pursuant to its plea agreement entered into simultaneously herewith. The Total Criminal Penalty reflects a ten (10) percent discount off the bottom of the applicable U.S.S.G. fine range for the Company’s cooperation. The Company and the Offices further agree that the Company will pay the United States $1,263,088,000, $500,000 of which will be paid as a criminal fine by Goldman Malaysia …
The Offices agree to credit the remaining amount of the Total Criminal Penalty against the amount the Company pays to the SEC, Fed, DFS, UK FCA and PRA, Singapore AGC, Singapore CAD and Hong Kong SFC. The Offices will credit the entire penalty amount that the Company pays to the SEC, Fed, DFS, UK FCA and PRA, Singapore AGC and Singapore CAD, as well as $100 million of the penalty the Company pays to Hong Kong SFC, in connection with parallel resolutions entered into between the Company and those authorities. The Company’s payment obligations to the United States under the Agreement will be complete upon the total payment of $1,263,088,000, so long as the Company pays the remaining amount of the Total Criminal Penalty to the SEC, Fed, DFS, UK FCA and PRA, Singapore AGC and Hong Kong SFC, by the end of one year from the beginning of the Term.”
As a condition of settlement, Goldman agreed “that it will report to the Offices annually during the Term regarding remediation and implementation of the compliance measures described in Attachment C.”
Based on the same core conduct alleged above, Goldman Malaysia was also charged with conspiracy to violate the FCPA’s anti-bribery provisions and agreed to this plea agreement.
In the DOJ release, Acting Assistant Attorney General Brian Rabbitt stated:
“Goldman Sachs today 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 U.S. financial system.”
Acting U.S. Attorney Seth DuCharme of the Eastern District of New York stated:
“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. Today’s resolution, which includes a criminal guilty plea by Goldman Sachs’ subsidiary in Malaysia, demonstrates that the department will hold accountable any institution that violates U.S. law anywhere in the world by unfairly tilting the scales through corrupt practices.”
Assistant Director in Charge William Sweeney Jr. of the FBI’s New York Field Office stated:
“When government officials and business executives secretly work together behind the scenes for their own illegal benefit, and not that of their citizens and shareholders, their behavior lends credibility to the narrative that businesses don’t succeed based on the quality of their products, but rather their willingness to play dirty. Greed eventually exacts an immense cost on society, and unchecked corrupt behavior erodes trust in public institutions and government entities alike. This case represents the largest ever penalty paid to U.S. authorities in an FCPA case. Our investigation into the looting of funds from 1MDB remains ongoing. If anyone has information that could assist the case, call us at 1-800-CALLFBI.”
Special Agent in Charge Ryan Korner of IRS Criminal Investigation’s (IRS-CI) Los Angeles Field Office stated:
“1MDB was established to drive strategic initiatives for the long-term economic development of Malaysia. Goldman Sachs admitted today that one billion dollars of the money earmarked to help the people of Malaysia was actually diverted and used to pay bribes to Malaysian and Abu Dhabi officials to obtain their business. Today’s guilty pleas demonstrate that the law applies to everyone, including large investment banks like Goldman Sachs. IRS Criminal Investigation will work tirelessly alongside our law enforcement partners to identify and bring to justice those who engage in fraud and deceit around the globe. When the American financial system is misused for corruption, the IRS will take notice and we will take action.”
SEC
Based on the same core conduct alleged in the DOJ enforcement action, the SEC also brought this administrative order against Goldman. In summary fashion, it finds:
“This matter relates to a scheme perpetrated by now former senior employees of Goldman Sachs who authorized and paid bribes and kickbacks to government officials in Malaysia and the Emirate of Abu Dhabi (“Abu Dhabi”) in order to secure lucrative business for the Company and benefits for themselves. Goldman Sachs violated the antibribery, books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”) in connection with the scheme.
1Malaysia Development Berhad (“1MDB”) is a Malaysian state-owned and controlled investment fund created to pursue projects for the economic benefit of Malaysia and its people. Between approximately 2009 and 2014, as 1MDB raised capital to fund its projects, billions of dollars were diverted from 1MDB. The diverted funds included a substantial portion of the approximately $6.5 billion in capital that 1MDB raised in 2012 and 2013 through three bond offerings that it executed with Goldman Sachs (the “Bond Deals”). As part of the scheme, certain former senior employees of Goldman Sachs authorized and paid bribes to government officials in Malaysia and in Abu Dhabi to obtain and retain lucrative business for Goldman Sachs, including the 2012 and 2013 bond deals, from which Goldman Sachs earned approximately $600 million.”
As to “Goldman Sachs’s Anti-Corruption Program and Deal Approval Process,” the order finds:
“Goldman Sachs had a general anti-corruption policy (including both a written Statement of Principles Regarding Anti-Bribery and related policies and procedures, collectively the “Anti-Bribery Policy”) applicable to all employees that expressly prohibited improper payments to government officials intended to obtain or retain business for the company. Goldman Sachs’s Anti-Bribery Policy was overseen and enforced by its compliance function (the “Compliance Group”) and its Business Intelligence Group (the “Intelligence Group”).
In addition to the Anti-Bribery Policy aspects of Goldman Sachs’s system of internal accounting controls, including the committee review process, were intended to help ensure that transactions were executed in accordance with management’s wishes. The Compliance Group and the Intelligence Group worked with, and as part of, various Goldman Sachs committees (“GS Committees”) in reviewing transactions.
Goldman Sachs’s role as underwriter for the Bond Deals meant that the firm would be using its own capital to fund the initial purchase of the 1MDB bonds. Accordingly, the transactions were formally reviewed and approved by multiple GS Committees including the Firmwide Capital Committee (“GS Capital Committee”). The GS Capital Committee’s charter states as follows:
The Committee provides approval and oversight globally of debt-related transactions, including principal commitments of the Firm’s capital. The Committee aims to ensure that business, reputational and suitability standards for underwritings and capital commitments are maintained on a global basis.
The GS Committees played a critical role in the chain of management approvals necessary for transactions such as the Bond Deals to be consummated. At the time of the Bond Deals, transactions could be granted conditional approval by the GS Capital Committee, provided there was further follow-up on specified issues prior to deal execution. In terms of recordkeeping and documentation, the principal inputs to the GS Capital Committee were the internal memoranda prepared by deal team members under the supervision of senior employees such as Leissner, and the principal outputs were written meeting minutes that should record the GS Capital Committee’s decisions and set forth any prerequisite follow-up items.”
As to Project Magnola, the order finds:
“Goldman Sachs’s books and records relating to the Magnolia bond offering failed to accurately reflect key aspects of the transaction, including the involvement of a third-party intermediary.”
As to Project Maximus, the order finds:
“Goldman Sachs’s books and records relating to the Maximus bond offering failed to accurately reflect key aspects of the transaction, including the involvement of a third-party intermediary.”
As to Project Catalyze, the order finds:
“Goldman Sachs’s books and records relating to the Catalyze bond offering failed to accurately reflect key aspects of the transaction, including the involvement of a third-party intermediary.”
Under the heading “Goldman Sachs’s Failure to Maintain Adequate Internal Accounting Controls,” the order finds:
“Goldman Sachs failed to maintain a sufficient system of internal accounting controls between 2012 and 2015 with respect to the process by which it reviewed and approved the commitment of firm capital in large, significant and complex transactions, such as the Bond Deals. This resulted in Goldman Sachs’s failing to reasonably assure adequate documentation of the GS Capital Committee’s processes, including follow-up, oversight and documentation regarding due diligence of concerns raised by the GS Capital Committee regarding the Bond Deals. Under the Company’s policy, the GS Capital Committee was intended to serve a vital control function with regard to significant commitments in firm capital. Goldman Sachs initiated enhancements to its processes with respect to committee documentation in 2015.
Each of the three Bond Deals was submitted to the GS Capital Committee, and as was typical practice at the firm, the GS Capital Committee transaction review took place in stages. The Committee’s approvals were granted conditionally, meaning that further action steps were needed – typically by the deal team – to address open items or conduct due diligence on significant concerns raised during the GS Committee process before approval of a given transaction would become effective. Follow-up was required on a number of items for the Bond Deals, including the Middle Eastern Sovereign Wealth Fund guarantee on the first Bond Deal.
Goldman Sachs’s Debt Underwriting Group had responsibility for confirming that follow-up items were completed prior to a deal closing. However, due to weaknesses in the implementation of this control, the results of this follow-up were not documented consistent with the GS Capital Committee providing its vital control function.”
Based on the above, the SEC found that Goldman violated the FCPA’s anti-bribery, books and records and internal controls provisions.
The order states:
“Goldman Sachs shall pay to the Commission disgorgement of $606,300,000, which shall be deemed satisfied by the payment previously made to the Government of Malaysia and 1MDB pursuant to a parallel Settlement Agreement entered into by Goldman Sachs on August 18, 2020;
“Goldman shall … pay a civil money penalty in the amount of $400,000,000 to the Securities and Exchange Commission.”
In the SEC’s release, Charles Cain (Chief of the SEC’s FCPA Unit) stated:
“Corruption risks can be posed by those at all levels of a company, including in the senior ranks. This case demonstrates how important it is for companies to have controls that are tailored to the risks presented by persons employed at all levels.”
Goldman was represented by Sullivan & Cromwell attorneys Nicholas Bourtin, Stephanie Wheeler, Nicole Friedlander and Sharon Cohen Levin; Kirkland & Ellis attorneys Mark Filip and Robert Allen; and Paul Hastings attorney Robert Luskin.
In this release, David Solomon (Chairman and CEO of Goldman) stated:
“This has been a long process and we are pleased to be putting these matters behind us. But, we are not putting the lessons learned from this experience behind us. I have thought a lot about our role in the 1MDB transactions and have weighed carefully the findings of the investigations. Nearly two years ago, I said to all of you that our obligation is to be self-reflective and self-critical. That is more important than ever today.
While it is abundantly clear that certain former employees broke the law, lied to our colleagues and circumvented firm controls, this fact does not relieve me or anyone else at the firm of our responsibility to recognize two critical realities.
First, as an organization that seeks to live up to a common set of ideals and values, we are responsible for each other’s actions. We all share in the benefits when our colleagues perform well for our clients. The opposite must be true as well. When a colleague knowingly violates a firm policy, or much worse, the law, we – as a firm – have to accept responsibility and recognize the broader failure that individual behavior represents for our firm.
Second, we have to acknowledge where our firm fell short. While many good people worked on these transactions and tried to do the right thing, we recognize that we did not adequately address red flags and scrutinize the representations of certain members of the deal team, most notably Tim Leissner, and the outside parties as effectively as we should have.
There are consequences for not getting it right and this settlement is an important acceptance of this fact. Today, our Board of Directors announced action with respect to past and current senior management compensation, among other areas of focus. This action is entirely appropriate under the circumstances. The Board’s announcement is an important reminder that we are all responsible for each other’s actions, including our collective failures.
Several years ago, we began making significant enhancements to our compliance and internal controls. Several of our regulators have noted these substantial enhancements in their settlement documents. These improvements include re-designing our framework for addressing reputational risk, including the creation of a Firmwide Reputational Risk Committee that is made up of predominantly control-side members who are empowered to stop any transaction. More broadly, since the 1MDB transactions eight years ago, our Global Compliance Division has nearly doubled in size.
More recently, we imposed additional conditions for sovereign-related financings, including requiring certifications from certain government bodies on the use of proceeds within six months of a transaction closing and subjecting these transactions to review by an independent team of bankers. In addition, we have created a Compliance Forensics Program that ensures forensic reviews focusing on people, places, events and processes that could present risk. Related to this effort, we established an Insider Threat Program that leverages enhanced surveillance analytics to prevent and detect potentially harmful action by employees.
Over the past several years, we have materially changed our focus to put reputational risk at the center of our decision-making. We must always remain open to improvement, learn from our mistakes and accept the consequences when we fail.
We must continue to hold ourselves to the highest standards, and each of us has a vital role to play. Our success as a firm can only be ensured through a culture rooted in integrity, shaped by a long-term mindset and guided by a sense of personal accountability and responsibility for our actions.”
The release also contains the following statement from Goldman’s Board of Directors:
“The Board of Directors of The Goldman Sachs Group, Inc. has been engaged for more than five years with the senior management of the Firm on the matter of the underwriting of bonds associated with 1Malaysia Development Berhad (1MDB) that took place beginning eight years ago. As part of this effort, in February 2019, the Board announced that, given ongoing investigations related to 1MDB, it reserved the right to adjust certain compensation to past and current members of senior management when more information about 1MDB matters became available.
Today, Goldman Sachs announced settlements that resolve the government and regulatory investigations of the 1MDB matter. The Board views the 1MDB matter as an institutional failure, inconsistent with the high expectations it has for the Firm. To this end, the Board has been and continues to be focused on ensuring the proper controls and oversight are in place, repairing the reputational damage that has been done, and reinforcing the values the Firm aspires to live by.
Further, while none of the past or current members of senior management were involved in or aware of the Firm’s participation in any illicit activity at the time the Firm arranged the bond transactions, the Board has determined that it is appropriate in light of the findings of the government and regulatory investigations and the magnitude of the total 1MDB settlement that compensation for certain past and current members of senior management be impacted.
For those former employees implicated in the criminal scheme, the Firm has undertaken clawback actions to the full extent of its contractual entitlements with respect to three individuals: Tim Leissner, who has plead guilty to criminal charges; Ng Chong Hwa, who has been charged with the same crimes; and Andrea Vella, who has been prohibited by the Federal Reserve from participating in the banking industry. The amounts the Firm is seeking to forfeit from these individuals total approximately $76 million, of which the Firm is currently holding approximately $24 million.
Separately, in acknowledgement of the Firm’s institutional failures, five of the Firm’s former senior executive officers, the former Chief Executive Officer, the former Chief Operating Officer, a former Chief Financial Officer, the former Vice Chairman who was a CEO of Goldman Sachs International and the former Vice Chairman who was the Global Head of Growth Markets, will, to the extent not already paid, forfeit all or the majority of their outstanding Long-Term Performance Incentive Plan Awards that were granted in 2011 and which have a performance period that includes 2012 and 2013 when the 1MDB bond underwritings took place, and forfeit a portion of other previously awarded compensation, if applicable. One of these retired senior executives who previously received the 2011 award has voluntarily agreed to return the majority of it. The Firm is in active discussion with another of these retired senior executives, who also already received the 2011 award, about returning the majority of it as well. The amounts for these five individuals represent a portion of the pre-tax value of these awards granted or paid, and total approximately $67 million.
In addition, we think it is appropriate that the current executive leadership team, the Chief Executive Officer, the Chief Operating Officer and the Chief Financial Officer, as well as the current CEO of Goldman Sachs International, have their overall compensation reduced by $31 million for 2020.
These clawbacks, forfeitures and compensation reductions will total approximately $174 million in the aggregate.
The Board has overseen significant enhancements to compliance and internal controls, including over the past five years. These enhancements include expanding the global compliance division; establishing an enhanced framework for addressing potential reputational risks, including an expanded review of significant and complex transactions; improving anti-bribery controls; enhancing the technical sophistication and training for the control-side of the Firm; and creating new programs to investigate and prevent risks and potentially harmful actions. More recently, the Firm has taken additional steps, including instituting new control procedures for higher risk sovereign-related financings and strengthening conduct oversight. The Board and senior management will continue to focus on further strengthening and improving these.
A special committee of the Board of Directors, comprised of the Lead Director and the Chairs of each of the Audit, Risk, Public Responsibilities and Compensation Committees of the Board, will oversee and review the remediation efforts arising out of the lessons of 1MDB.”
The release also this presentation titled “Completed and Ongoing Enhancements Since the 1MDB Transactions.”
On the day of the enforcement action, Goldman’s stock closed up 1.23%
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