Goldman Sachs: Part 4 – Avoiding a Monitor

Thomas Fox

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. Today, I want to focus the Goldman Sachs remediation and avoidance of a corporate monitor.

In the Deferred Prosecution Agreement (DPA) Goldman Sachs committed to the Department of Justice (DOJ) (and probably the other government regulators) that it is “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)”. Goldman Sachs did receive a huge benefit from finally getting that message as “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”.

One might think that after not self-disclosing, denying the firm had done anything wrong, claiming high level rogue employees, Timothy Leissner and Roger Ng, had deceived the firm (see Goldman Sachs November 2018 10-Q statement) or that low level compliance functionaries had failed to do their jobs and uncovered the massive fraud that a Corporate Monitor was appropriate. However, mounting a vigorous defense (even if both wrong and wrong-headed) is no longer the criteria for a monitor.

The test is now found in the Benczkowski Memo. The Memo notes that factors to consider from the compliance program remediation perspective include “(c) whether the corporation has made significant investments in, and improvements to, its corporate compliance program and internal controls system and (d) whether remedial improvements to the compliance program and internal controls have been tested to demonstrate that they would prevent or detect similar misconduct in the future.”

But the Memo does not stop there in prescribing the inquiry a DOJ prosecutor should make. Other factors include whether remedial actions were taken against those involved and those who may have looked the other way or through inaction, effectively over-riding internal controls. Further, the DOJ prosecutors have to drill down and look at the risk each company is facing, included assessments of the industry the company operates in, the geographic regions it does business in, how the company does business and the “nature of the company’s clientele.” Finally, this section of the Memo ends with “Where a corporation’s compliance program and controls are demonstrated to be effective and appropriately resourced at the time of resolution, a monitor will not be necessary.”

The first part requires a look at remedial actions taken by Goldman Sachs. Prior to his indictment, the Goldman Sachs mastermind, Leissner had resigned from the firm. Ng was fired when he was indicted. Finally, although not indicted (as of yet) former Goldman Sachs banker Andrea Vella was put on leave in November 2018 and left the firm after being banned by the Federal Reserve System in February 2020 over his alleged involvement in the 1MDB scandal. In his not clear if the departure of the former head of Goldman Sachs Lloyd Blankfein was in any way related to the 1MDB scandal. So at least some persons were sanctioned or at least left Goldman Sachs.

But more than simply termination, the Board of Directors announced it was seeking clawbacks and engaging in holdbacks of compensation in not simply those involved but a group in senior management as well. In a Press Release, the Board noted the Firm has undertaken clawbacks as to: Leissner, Ng and Vella. 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, “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.” Finally,  the Board found it “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, holdbacks and compensation reductions will total approximately $174 million in the aggregate.

What has Goldman Sachs done to demonstrate at the time of resolution, its compliance program and internal controls were effective and appropriate resourced? David Solomon, current Goldman Sachs Chief Executive Officer (CEO), in the same Press Release said about the improvements to the compliance function, “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.”

For the first time I can remember, Goldman Sachs released a summary presentation, entitled Completed and Ongoing Enhancements Since the 1MDB Transactions. Please join me tomorrow where I look at the Goldman Sachs remediation program.

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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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