Frosty the Snowman. Which is your favorite version – the Jimmy Durante single or the cartoon version; narrated by Jimmy Durante? The song recounts the fictional tale of Frosty, a snowman who is brought to life by a magical silk hat that a group of children find and place on his head. Frosty enjoys roaming throughout town with the children who constructed him, only stopping once at a crosswalk when the policeman directing traffic orders pedestrians to stop. Frosty finally says goodbye to the children as the Sun is heating up and he will melt. Yet, he promises, “I’ll be back again someday”. In the cartoon version, Frosty heads up to the North Pole to avoid melting.
I thought Frosty was a good analogy to consider the disgraced Goldman Sachs Group Inc.’s former partner Tim Leissner, as he is certainly back again. Yesterday, I begin a two-part blog post series on Leissner’s settlement with the Securities and Exchange Commission (SEC) for his role in the facilitation of bribery and corruption in the 1MDB saga, focusing on the actions of Leissner which were violations of the Foreign Corrupt Practices Act (FCPA). The SEC settlement was via a Cease and Desist Order (Order). Today I want to consider Leissner’s specific legal violations and what lessons may be garnered for the compliance professional.
Leissner was a partner at Goldman Sachs, a US company. He was pretty high up in the organization. What his actions mean for Goldman Sachs is, at this point, still an open question. Leissner himself “made use of interstate commerce by, among other things, sending wire transfers from a foreign bank account to a U.S. bank account in furtherance of his corrupt offers and promises to bribe foreign officials, through which Leissner intended that the officials would use their official positions to assist Goldman Sachs in obtaining the bond deals and other business.” He also worked to actively conceal “information from financial, legal and compliance executives, including by making misstatements to these executives regarding Low’s role as an intermediary in the bond deals.” This knowing circumvention of the company’s internal controls caused Goldman Sachs books and records to be falsely recorded.
These actions break down into violation of the FCPA by paying or facilitating the payment of bribes; circumvention of internal controls and falsification of books and records. Based on these actions and Leissner’s conduct, what can the compliance professional glean that can be used to improve a corporate compliance program going forward? For it is certainly one issue to have employees bending rules to get around them but it is an entirely different quality to have partners who will lie, cheat and steal. The basic answer is the eyes of Doctor. T. J. Eckleburg; (How is that for cross-cultural metaphor?) or in the parlance of a process analyst – a second set of eyes.
It all starts with the folks that you hire and promote to senior leadership positions or, in the case of Goldman Sachs, to the partnership. This is why character really does matter in such things. If someone cuts corners early in their career, they are far more likely to do so as they rise up the corporate ladder. It also demonstrates that there must be a compliance evaluation when an employee is promoted to senior management or in a company like Goldman Sachs, to partner. Even if they have great metrics around revenue, if they do not have the ethical grounding, it does not matter what type of producer they are, they will eventually cost the company. Goldman Sachs made nearly $600 million in profits from its three bond sales involving 1MDB. The Malaysian government wants that money returned claiming it is ill gotten gain (Profit disgorgement) and has been charged criminally in that country. The company is also facing a FCPA enforcement action here in the US. The costs for Goldman Sachs promoted Leissner into its partnership ranks will be far higher than any amount of revenue he generated for the firm.
The next lesson to be garnered is around Leissner’s specific conduct of misrepresentations to both the company’s compliance and legal functions. When it came to considering the Project Maximus bond offering, according to the Order, “Leissner was directly asked whether Low was involved in Project Maximus. Leissner told the GS Committee affirmatively that Low was not involved in Project Maximus, though Leissner and other senior executives of Goldman Sachs knew at the time that this statement was false.” What is a compliance professional to do in this situation?
The first answer is to be found in the part of the language which reads “and other senior executives of Goldman Sachs knew at the time that this statement was false.” Your first line of defense is other senior executives who know information is false and misleading and saying so. If not immediately, then privately later. This means not only effective training but real leadership from the top of the organization that it will not countenance inappropriate and illegal behavior and it is incumbent that everyone speaks up to stop it.
The second lesson is the Eyes of Doctor T. J. Eckleburg. He was the optometrist whose billboard advertising was a prominent feature of The Great Gatsby, where the ‘eyes’ watched Tom drive into New York City for his trysts with his mistress. The lesson is that every process must have a ‘second set of eyes’. You might call it trust but verify but there must be a mechanism to verify that the information provided is accurate. Goldman Sachs was already on notice about Jho Low and his involvement with 1MDB as Leissner had three times pushed for him to become a client of the firm but he could not pass due diligence as he could not demonstrate the source of his wealth.
Unlike Frosty the Snowman, Leissner’s tale is a sordid one. Yet it still provides lessons for the compliance professional. And like the song says of Frosty, Leissner will be back again someday. He returned last week in the form of his FCPA settlement with the SEC to remind us of these key lessons.
