Goldman Sachs: Part 2 – Control Failures

Thomas Fox
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Compliance Evangelist

We continue our exploration of The Goldman Sachs Group, Inc. (Goldman Sachs) Foreign Corrupt Practices Act (FCPA) settlements and related enforcement action, literally across the globe, from the state of New York to Singapore, Hong Kong, Malaysia and United Kingdom. Harry Cassin, writing in the FCPA Blog, said, “Goldman Sachs Group Inc. shattered our top ten list with a $3.3 billion FCPA settlement with the U.S. Department of Justice and Securities and Exchange Commission, sending it straight to number one. In last week’s settlement, the DOJ imposed a $2.3 billion criminal penalty, and the SEC imposed a civil penalty of $400 million and disgorgement of $606.3 million.”

Today, I want to focus on the internal control failures which lay at the basis of the Securities and Exchange Commission (SEC) Cease and Desist Order (the “SEC Order”). Before we get to those failures, I wanted to detail some of the things that the Goldman Sachs compliance function got right. It was around the myriad attempts by self-admitted FCPA felon and former Goldman Sachs Partner Timothy Leissner to have Jho Low approved into the Personal Wealth Management program (PWM). According to the Deferred Prosecution Agreement (DPA), “Leissner and [Goldman Sachs Managing Director Roger] 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.”

Each of these attempts was rejected by the Goldman Sachs compliance function. In the first instance, a member of the firm’s Business Intelligence Group (BIG) wrote “I do not believe we will ever be able to get comfortable with this matter. I’d like to shut this down once and for all . . . It is seldom that one sees a vendor report, which has been backed up verbally by them, that so clearly states that we should exercise extreme caution.” Later attempts brought the same result. “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.”

Not being deterred one iota, 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.””

However, when it came to the three bond transactions at issue: Project Magnolia, Project Maximus and Project Catalyze; the Goldman Sachs due diligence fell apart. For deals of this nature, Goldman Sachs had three committees review each deal: (1) The Goldman Sachs Capital Committee (GSGC); (2) Firmwide Capital Committee (FWCC) and (3) BIG. Both the company’s compliance function and FWCC had representatives on the FWCC.

In the due diligence done on Project Magnolia, employees within Goldman’s control functions suspected that Low was involved in the deal,  yet “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.” There was no independent verification of the information provided by the deal team. Leissner repeated lied to anyone internally who asked if Low was involved in Project Magnolia. Yet apparently Goldman Sachs control personnel knew that Leissner was not telling them the truth, with one un-named employee stating, “Important we have no role on our side for Low and we should ask that any payments from any of [the] participants to any intermediaries are declared and transparent.” The deal was approved internally by Goldman Sachs.

In Project Maximus, both “Leissner and Ng understood and intended that Low and others would pay bribes and kickbacks to influence Malaysian and Abu Dhabi officials to obtain the necessary approvals to execute the Project Maximus bond offering.” Moreover, “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. For example, on or about June 20, 2012, a member of Goldman’s control functions asked members of the deal team, “Is Jho Low involve[d] in this transaction? Please also keep us posted if there are any other politically exposed person involve[d] in this transaction in a non-official capacity.” A deal team member responded “no”.” Finally, “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.”

The same pattern presented itself with Project Catalyze. The SEC Order stated, “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.” This was the third bond deal in less than 20 months, all in 2012. This obvious red flag was never investigated, let alone cleared.

What makes these control failures in the three bonds deals stand out so much is that Goldman Sachs not only knew who and what Low was but the company itself had investigated him. Further, according to the state of New York Department of Financial Services Consent Order, Goldman Sachs had a single, enterprise wide compliance function. Yet it appears that the information that was developed by the compliance function when Leissner sponsored to Low become a PWM client seemingly did not make its way to the GSCC, FWCC or BIG.

Tomorrow I will consider the fines, penalties and DPA.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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