November saw several new and significant developments in the long-running 1Malaysia Development Berhad (1MDB) scandal as the US Department of Justice (DOJ) announced one guilty plea, one arrest and one indictment. The guilty plea came from former Goldman Sachs Group Inc. (Goldman Sachs) banker in Southeast Asia, Timothy Leissner, who was the client relationship manager for the Malaysian sovereign wealth fund, the country’s former Prime Minister Najib Razak and the person alleged to have looted the fund, Jho Low. As was laid out in a two-count Criminal Indictment, Leissner pled guilty to both money laundering and violations of the Foreign Corrupt Practices Act (FCPA). He was ordered to forfeit $43.7 million in ill-gotten gain from his illegal activities.
In a three-count Indictment, another Goldman Sachs employee, Roger Ng, was charged with conspiracy to violate the FCPA and money-laundering. Ng was arrested in Singapore and will presumably be transported to the US to stand trial or more likely plead guilty. According to the FCPA Blog, “Ng circumvented Goldman’s internal accounting controls, the DOJ said. Goldman Sachs underwrote more than $6 billion in bonds issued by 1MDB in three separate bond offerings in 2012 and 2013 while Ng was a managing director.”
Also indicted was the alleged mastermind, Jho Low, who kept most of the proceeds from the looting of the 1MDB and shared with persons, literally around the world; most importantly the former Malaysian Prime Minister and his wife. The DOJ Press Release identified three major schemes which were literally the outright theft of monies from 1MDB, stating “between approximately 2009 and 2014, as 1MDB raised money to fund its projects, billions of dollars were misappropriated and fraudulently diverted from 1MDB, including funds 1MDB raised in 2012 and 2013 through three bond transactions that it executed with the Financial Institution.”
The first was Project Magnolia and the Press Release stated, “In early 2012, according to allegations in court filings, following a series of meetings in Malaysia and the United Kingdom, Low, Leissner, Ng and the co-conspirators agreed that, with the assistance of the Financial Institution, 1MDB would issue $1.75 billion in bonds guaranteed by an entity wholly-owned and controlled by the government of Abu Dhabi.” The ‘Financial Institution’ has been identified as Goldman Sachs. Thereafter, “After Project Magnolia closed on or about May 21, 2012, more than $500 million of the bond proceeds were allegedly misappropriated and diverted from 1MDB through numerous wire transfers to bank accounts in the name of shell companies beneficially owned and controlled by Low, Leissner, Ng, and” others.
The second and third were Projects Maximus and Catalyst, which were bond offerings in which Goldman handled the bond offering. The Press Release stated the “transactions generated substantial fees and revenues for the Financial Institution. As alleged, although both transactions were designed to raise more than $4 billion for 1MDB’s investment and development projects, Low, Ng, Leissner, and other co-conspirators used the transactions to further the criminal scheme, ultimately laundering hundreds of millions of dollars of diverted funds from these transactions into bank accounts beneficially owned and controlled by” them. The FCPA Blog stated, “The DOJ said they conspired to launder the money in the United States by buying “luxury residential real estate in New York City and elsewhere, and artwork from a New York-based auction house, and by funding major Hollywood films,” including the Wolf of Wall Street.”
While the name Goldman Sachs was not explicitly stated in the indictments and guilty plea, it is clear the company is up to its Venice hip waders in this matter. Obviously when you have the head of Southeast Asia and a Managing Director plead guilty and be indicted it does not bode well for your organization. There is also the matter of the $600 million Goldman Sachs made on the bond offerings. In Leissner’s Criminal Information, it stated, “In the course of the scheme, the defendant TIM LEISSNER, together with Co-Conspirator #1, Co-Conspirator #2 and others, did obtain and retain 1MDB business for U.S. Financial Institution #1, including three bond offering transactions for 1MDB in 2012 and 2013. These three bond offerings and related transactions ultimately earned U.S. Financial Institution #1 approximately $600 million in fees and revenue and resulted in LEISSNER, Co-Conspirator #2 and others obtaining large bonuses from U.S. Financial Institution #1 and enhanced their professional reputations at U.S. Financial Institution #1.” It went on to state, “Although the stated purpose of the approximately $6.5 billion raised by the three bond transactions was to support 1MDB projects for the benefit of the Malaysian people, more than $2.7 billion was instead misappropriated by the defendant TIM LEISSNER and his co-conspirators.”
In a November 2, 2018 10Q filing Goldman Sachs tried to get ahead of the massive legal problem it finds itself in by using a variation of the rogue employee(s) defense. It stated, “The plea and charging documents indicate that Leissner and Ng knowingly and willfully circumvented the firm’s system of internal accounting controls, in part by repeatedly lying to control personnel and internal committees that reviewed these offerings. The indictment of Ng and Low alleges that the firm’s system of internal accounting controls could be easily circumvented and that the firm’s business culture, particularly in Southeast Asia, at times prioritized consummation of deals ahead of the proper operation of its compliance functions.”
II. Over-ride or Lack of Controls at Goldman Sachs?
Next, I want to discuss the schemes to loot 1MDB in the Indictment and Information. These documents provided a level of detail which demonstrate how companies must remain vigilant with their anti-corruption compliance program. For even though Goldman Sachs has started a campaign to claim Leissner, Ng and perhaps others were rogue employees who lied, cheated and obfuscated, the reality is that Goldman Sachs allowed key internal compliance controls to be over-ridden or simply avoided and there was no manner to check on what were clearly red flags raised through the relationship between Leissner, Ng, Low, 1MDB and corrupt politicians in several countries.
The Information laid out that Leissner and Ng had tried to get Goldman Sachs to take on Low directly as a client. However Low could not pass the company’s own due diligence requirements regarding the sources of his funding as far back as 2009. “Between in or around September 2009 and in or around March 2011, the defendant TIM LEISSNER and others, including Co-Conspirator #2 [Ng], supported at least three attempts to make Co-Conspirator #1 [Low] a formal client of U.S. Financial Institution #1. LEISSNER and Co-Conspirator #2 supported these efforts because, in part, they believed that Co-Conspirator #1 would work to deliver lucrative business deals, including from 1MDB, for the ultimate benefit of U.S. Financial Institution #1, [Goldman Sachs] LEISSNER, Co-Conspirator #2 and others. These attempts were unsuccessful because certain personnel within U.S. Financial Institution #1's Compliance Group and Intelligence Group [Law Department] refused to approve the business relationship with Co-Conspirator #1 based, in part, on concerns that they had about the source of Co-Conspirator #1 's wealth.”
Nonetheless, “Notwithstanding their knowledge of the concerns that had been raised about Co-Conspirator #1 not being a suitable client for U.S. Financial Institution #1, LEISSNER and other employees and agents of U.S. Financial Institution # 1, including Co-Conspirator #2, continued to conspire with Co-Conspirator # 1 based upon their belief that Co-Conspirator #1 would help ensure that government officials within 1MDB, the Malaysian government and Abu Dhabi would deliver lucrative business deals to U.S. Financial Institution #1.” The bottom line is that Goldman Sachs was aware that Low did not meet its own due diligence requirements but either turned its eyes away when he brought $6bn+ in deals or its internal controls somehow failed.
These failings on the transactions seem even more particular when considering the three main deals outlined in the Information and Indictment. They were Project Magnolia for approximately $1.25 bn, alleged for funds to purchase an energy company; Project Maximus for approximately $1.75 bn for the purchase of a power plant and Project Catalyze for a stunning $3bn to fund a joint venture with an Abu Dhabi company. For this over $6bn in bond offerings, Goldman Sachs was paid $600,000.
Even though Low had been rejected as client for Goldman Sachs, Leissner and Ng knew he was behind the bond offerings, but “As with Project Magnolia, while the defendant TIM LEISSNER, Co-Conspirator #2 and others continued to work with Co-Conspirator # 1 to acquire this business for U.S. Financial Institution #1 and to execute the second bond issuance, they concealed Co-Conspirator #1 's involvement in the transaction from the Compliance Group and Intelligence Group at U.S. Financial Institution #1 for the same reasons that they concealed his involvement with Project Maximus.” Somehow neither Goldman Sachs compliance or legal functions were ever aware of Low’s involvement.
One reason might be, because the Financial Times (FT) reported “A second person with knowledge of the deal’s approval process confirmed that more than 30 people at the bank reviewed it. “There was no concern that the money was going to be stolen”. The internal Goldman Sachs reviewers included former CEO Lloyd Blankfein and the current CEO David Solomon, “who was head of Goldman’s investment banking division from 2006 to 2012, as well as Gary Cohn, then chief operating officer of the bank.”
In its Quarterly Report (10-Q) Goldman Sachs stated, the following:
“[T]he plea and charging documents indicate that Leissner and Ng knowingly and willfully circumvented the firm’s system of internal accounting controls, in part by repeatedly lying to control personnel and internal committees that reviewed these offerings.
The indictment of Ng and Low alleges that the firm’s system of internal accounting controls could be easily circumvented and that the firm’s business culture, particularly in Southeast Asia, at times prioritized consummation of deals ahead of the proper operation of its compliance functions.
In addition, an unnamed participating managing director of the firm is alleged to have been aware of the bribery scheme and to have agreed not to disclose this information to the firm’s compliance and control personnel. That employee, who was identified as a co-conspirator, has been put on leave.”
Goldman Sachs has said it is cooperating with authorities. The FT reported that 10Q noted that “possible losses related to litigation proceedings could run as high as $1.8bn above its total reserves for such matters. Previously, Goldman estimated an excess of $1.5bn.” It will be interesting to see how all this plays out going forward.
III. Initial Lessons Learned
I want to conclude by considering the lessons for the compliance professional that we have learned so far.
A. Due Diligence, Due Diligence, Due Diligence
One thing made clear from this matter is that due diligence is not a one-time, discreet event. It is an ongoing process by which new information comes in and is evaluated for a risk-based approach to conducting business. Most interestingly in this matter, Leissner tried to get Goldman Sachs to take on Low as a customer. However, according to the Information, these attempts were unsuccessful because certain personnel within Goldman Sachs’s Compliance Group and Intelligence Group refused to approve the business relationship with Low, “in part, on concerns that they had about the source” of his wealth.
This rejection of Low’s application was communicated to Leissner and Ng. However, “Notwithstanding their knowledge of the concerns that had been raised about” Low not being a suitable client for Goldman Sachs, Leissner “and other employees and agents” of Goldman Sachs, continued to work with Low based upon their belief that he “would help ensure that government officials within 1MDB, the Malaysian government and Abu Dhabi would deliver lucrative business deals to” Goldman Sachs.
Yet, even though Low’s involvement in all three bond deals, Projects Maximus, Magnolia and Catalyze, was well-known throughout the southeast Asia region, this was not a part of the evaluation by Goldman Sachs on whether it should have gone forward with any of the transactions. In Goldman Sachs’ most recent Quarterly Report (10-Q), filed after the guilty plea and indictments were released, it stated, in part, “In addition, an unnamed participating managing director of the firm is alleged to have been aware of the bribery scheme and to have agreed not to disclose this information to the firm’s compliance and control personnel. That employee, who was identified as a co-conspirator, has been put on leave.”
Further, in a Financial Times (FT) article, entitled “More than 30 Goldman Sachs executives reviewed 1MDB deals”, Laura Noonan and Stefania Palma reported, “A second person with knowledge of the deal’s approval process confirmed that more than 30 people at the bank reviewed it. “There was no concern that the money was going to be stolen”.” The internal Goldman Sachs reviewers included former Chief Executive Officer CEO Lloyd Blankfein and the current CEO David Solomon, “who was head of Goldman’s investment banking division from 2006 to 2012, as well as Gary Cohn, then chief operating officer of the bank.”
In an unrelated FCPA Blog article, entitled “US v. Hoskins complicated due diligence on intermediaries”, Eric Lochner raised a risk related to FCPA violations, stating, “compliance officers will also need to police against opportunists inside and outside the organization. The Hoskins ruling created a class of at least some (possibly many) foreign intermediaries beyond the reach of the FCPA. So some employees and third parties might try to exploit that distinction, where those foreign nationals beyond reach do the dirty work of operating a bribery scheme.” That could certainly apply to Low.
B. Override of Internal Controls and Oversight
Even though the compliance and legal functions at Goldman Sachs prevented the company from taking on Low as a client, they failed miserably for the three bond deals. One of the reasons was the over-ride of internal controls. The 10-Q stated, “[T]he plea and charging documents indicate that Leissner and Ng knowingly and willfully circumvented the firm’s system of internal accounting controls, in part by repeatedly lying to control personnel and internal committees that reviewed these offerings…The indictment of Ng and Low alleges that the firm’s system of internal accounting controls could be easily circumvented and that the firm’s business culture, particularly in Southeast Asia, at times prioritized consummation of deals ahead of the proper operation of its compliance functions.”
How did (apparently) the southeast Asia business unit override these controls? It was the old-fashioned way, they lied. But you might wonder why an organization as large and international in scope as Goldman Sachs allow employees’ dissimilation to expose it to up to $1.8bn in fines, penalties and costs for this matter? It all brings up the need to have what Jonathan Marks has called “the “four eyes review/approval principle“, which requires a second review by supervisors from different reporting lines for substantive decisions, transactions, changes/overrides, etc. The second set of eyes must not only be done by someone from different reporting lines, but by someone who can be skeptical, is competent, understands the “red flags”, and if necessary can elevate any issues they might have. The “four eyes review/approval principle” is used to facilitate delegation of authority and increase transparency with the goals being adherence to company’s policies, compliance with laws and regulations, and the deterrence and detection of misbehavior or fraud.”
C. Corrupt Corporate Culture
Where was Goldman Sachs’ culture in all of this? As noted in the 10-Q, “the firm’s business culture, particularly in Southeast Asia, at times prioritized consummation of deals ahead of the proper operation of its compliance functions. In addition, an unnamed participating managing director of the firm is alleged to have been aware of the bribery scheme and to have agreed not to disclose this information to the firm’s compliance and control personnel.” This means there was a culture which supported doing business even if it was done illegally and others consciously looked the other way. It all sounds like a disaster not just waiting to happen but one which did happen.
