We conclude 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 give some final thoughts.
As many commentators have noted, it is the largest FCPA settlement of all-time, coming in at somewhere between $2.91 billion (according to the Department of Justice (DOJ)) to $3.3 billion (according to the FCPA Blog). One thing they both agree on is the criminal penalty assessed against Goldman Sachs by the DOJ, coming in at $1.263 million. Yet as with the case with any massive anti-corruption enforcement action, many compliance professionals have difficulty of relating to the resolution or finding anything in the resolution for their compliance program.
One of the best phrases I have seen written about lessons learned came from Asher Miller, writing in the FCPA Blog, who said, “Like in poker, if you can’t spot the fool around the table, it’s probably you.” While I tend to use “The Fool” as a Shakespearian-based noun, Miller using it as a verb may be on to something, certainly about Goldman Sachs. It was clear that at Goldman Sachs, compliance was the ultimate fool. It seemed to think it was there to perform a real corporate function, which amazingly it did by refusing to approve Jho Low as a Private Wealth Client, however, when it came to substantive due diligence on multi-billion transactions (generating millions in fees for Goldman Sachs) it was completely marginalized.
Did the Goldman Sachs compliance function know it was the fool at poker table? We may never know but if you are so marginalized in your organization; you have some hard decisions to make. You can stay and try to change things. You can move on; either ‘to pursue other opportunities or spend more time with your family’ or to another job. You can report internally so that your backside is protected or to set up a Securities and Exchange Commission (SEC), Sarbanes-Oxley (SOX) or state law whistleblower claim if you are discriminated against. You can put your head down and hope the nuclear fallout does not dust you too badly.
The problem at Goldman Sachs was Timothy Leissner and Low were clearly favored as they were bringing bug bucks into the firm. According to the Financial Times (FT), Low even met with the prior Chief Executive Officer (CEO) Lloyd Blankfein. I doubt they colluded to talk about the weather or even the sorry state of the NY Mets. If you are a third-party and meet with the CEO of Goldman Sachs, it is most probably to thank you for bringing all the money into the firm’s coffers. This simple fact of the meeting should tell you all you need to know about how Low and 1MDB were viewed by Goldman Sachs top management.
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 SEC Cease and Desist Order (the “Leissner 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. Unfortunately, under CEO Blankfein such leadership was apparently lacking.
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’. There must be a mechanism to authenticate that the information provided is accurate. Goldman Sachs was already on notice about 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.
This means compliance must figure out a way to continue to ask questions and perform due diligence to get to the bottom of the matter. I recognize that you should be able to take the word of a firm partner, however, if you are on notice that the information given to you is an outright lie, even in the age of Trump, you should take steps to test the veracity of the information. There are no ‘alternative facts’ only the truth so if you as a compliance professional or compliance function and you have any inkling of illegal or unethical conduct, you should channel another President, Ronald Reagan, and ‘trust but verify’.
For a final lesson, I would ask you to consider what is risk? In the case of Goldman Sachs, it meant several things. The first was that Goldman Sachs was using its own capital to purchase the bonds from Projects Magnolia, Maximus and Catalyze. This meant a heightened risk for the firm which led to the requirement there be iron clad guarantees for Goldman Sachs that another entity would guarantee the risk (i.e., risk-shifting). This is where the Abu Dhabi sovereign wealth fund came into the picture and bribes were authorized and paid by Goldman Sachs to garner those guarantees.
What about timing as a risk factor? These three bond deals where from 2012 to 2013. In basically a 12-month period, 1MDB raised over $6 billion in bond deals (and Goldman Sachs received $600 million fees). Did anyone think that raising so much money in such a short period of time seems suspicious? Did anyone even ask that question? If anyone did so internally at Goldman Sachs, they did not do so very loudly or they were shouted down quite quickly.
Payment as a risk factor? Every compliance practitioner should take away from the Goldman Sachs enforcement action that they must understand the payment process at their company. In the Leissner Order, the SEC detailed how, after each of the bond deals was pushed through, the proceeds were laundered directly from Goldman Sachs to shell companies owned or controlled by Low. Regarding Project Magnolia, the Leissner Order stated, “Goldman Sachs transferred the proceeds of the Magnolia bond offering via wire to the 1MDB entity designated to receive the payment. At the time, Leissner, Low and others knew that a large portion of the proceeds of the bond offering would be diverted to themselves and others, including government officials, through shell companies beneficially owned and controlled by Low, Leissner and others.” If your company is wiring out funds to shell accounts, it may will be engaging in money laundering.
I could probably write about 1MDB, Goldman Sachs, Leissner and Low for another month but all good things must come to an end. Roger Ng is set for trial in April 2021 so it will be interesting to see how that turns out. This entire saga involving Goldman Sachs has laid low one of the world’s top consultancy firms; literally with the best and the brightest. One can only hope they have learned their lesson.
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