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SFC reprimands and fines Goldman Sachs (Asia) L.L.C. US$350 million for serious regulatory failures over 1Malaysia Development Berhad’s bond offerings

Issue date: 2020-10-22 17:00:12

The Securities and Futures Commission (SFC) has reprimanded and fined Goldman Sachs (Asia) L.L.C. (Goldman Sachs Asia) US$350 million (HK$2.71 billion) for serious lapses and deficiencies in its management supervisory, risk, compliance and anti-money laundering controls that contributed to the misappropriation of US$2.6 billion from US$6.5 billion that 1Malaysia Development Berhad (1MDB) raised in three bond offerings in 2012 and 2013 (Notes 1 & 2).

The 1MDB bond offerings were arranged and underwritten by Goldman Sachs International, but the actual work was conducted by deal team members in multiple jurisdictions, and revenue generated from the transactions was shared among Goldman Sachs entities in different jurisdictions (Note 3). 

In particular, Goldman Sachs Asia, the compliance and control hub of Goldman Sachs in Asia and based in Hong Kong, had significant involvement in the origination, approval, execution and sales process of the three 1MDB bond offerings.  Ultimately, Goldman Sachs Asia received 37% of the total revenue of US$567 million generated from the bond offerings, in the sum of US$210 million, the largest share among the various Goldman Sachs entities.   

The SFC considers that Goldman Sachs Asia lacked adequate controls in place to monitor staff and detect misconduct in its day-to-day operation, and allowed the 1MDB bond offerings to proceed when numerous red flags surrounding the offerings had not been properly scrutinised and satisfactory answers to such red flags had not been obtained.

Mr Ashley Alder, the SFC’s Chief Executive Officer, said: “This enforcement action is the result of a rigorous, independent investigation conducted by the SFC into whether Goldman Sachs Asia’s involvement with 1MDB in 2012 and 2013 contravened the standards expected of firms under Hong Kong regulations.”

“The penalty in this case – assessed solely in accordance with Hong Kong’s own fining framework – reflects our findings that Goldman Sachs Asia failed to deal properly with numerous suspicious circumstances surrounding the 1MDB bond offerings.  These failures led to multiple, serious breaches of the rules which set out the high standards of behaviour expected of all firms supervised by the SFC,” Mr Alder added.

Mr Thomas Atkinson, the SFC’s Executive Director of Enforcement said: “The 1MDB fraud is a stark reminder to financial intermediaries involved in multi-jurisdiction transactions of the importance of having robust internal controls in place and taking all reasonable steps to protect the integrity of their operations and their clients from frauds and other dishonest acts.  Goldman Sachs Asia fell far short of the standards expected of a licensed intermediary in the 1MDB case and suffered not only reputational damage from its own failures, but also brought the securities industry into disrepute.”

The 1MDB bond deals were obtained for Goldman Sachs by Mr Tim Leissner, a responsible officer of Goldman Sachs Asia and a participating managing director of the investment banking division at the material time.  In August 2018, Leissner pleaded guilty to criminal charges brought by the United States Department of Justice (US DOJ) against him for conspiring to commit money laundering and to violate the Foreign Corrupt Practices Act.  Leissner admitted that he had conspired with a Malaysian financier, Mr Low Taek Jho, also known as Jho Low, and others to pay bribes and kickbacks to Malaysian and Abu Dhabi officials to obtain and retain the business from 1MDB for Goldman Sachs, including the bond offerings (Notes 4 to 6).

The SFC’s investigation found that Leissner was essentially given a free rein in the execution of the 1MDB bond offerings, enabling him to provide misleading information to – or conceal information from – Goldman Sachs without being adequately challenged.  

In particular, despite:

• evidence pointing to the involvement of Low in bringing about the first bond offering;
• Goldman Sachs’s knowledge that Low and Leissner were acquaintances and Low was very close to 1MDB and government officials in Malaysia and Abu Dhabi; and
• Low having been twice rejected as a private wealth management client as his source of wealth could not be verified, resulting in a potential money laundering risk,

Goldman Sachs’s regional and firm-wide committees that vetted the bond offerings accepted Leissner’s false assertions that Low had no roles in the bond offerings without making further inquiries.   

There were also numerous red flags which raised questions as to the commercial rationale of the bond offerings and serious money laundering and bribery risks, but they were not critically examined by various regional and firm-wide committees of Goldman Sachs, thus enabling Leissner and his conspirators to escape scrutiny.  These included the following:

• Despite being in a weak financial position with questionable ability to service existing debts, 1MDB raised US$6.5 billion within a short period of 10 months but the amounts raised far exceeded the actual needs of 1MDB.  Less than 50% of the funds raised in the first two bond offerings were intended to be used for the acquisition of power assets that had been identified.  In just four months after the second offering, 1MDB raised another US$3 billion to finance a joint venture that did not yet have concrete investment plans.  At that time, over US$1.6 billion of the proceeds from the first two transactions were still not utilised.
• Goldman Sachs received around US$581.5 million in fees from 1MDB, about 9% of the funds raised in these offerings.  The revenue Goldman Sachs earned from these three offerings alone was more than double the total revenue it generated from acting as an arranger and/or underwriter in 213 other Asia ex-Japan bond offerings in the five years between 2011 and 2015.
• 1MDB’s willingness to pay such high fees to Goldman Sachs as sole arranger and underwriter, and the engagement of Goldman Sachs for all three offerings without going through a competitive process should have raised questions about how the business was obtained from 1MDB, the reasonableness of the mandates, and whether the circumstances leading to such business raised any suspicions of bribery or other illicit conduct.
• 1MDB’s repeated emphasis on confidentiality and speed of execution, and its use of foreign private banks rather than Malaysian commercial banks to deposit the bond proceeds are other red flags present in all three bond offerings.
• In the course of reviewing the bond offerings, Goldman Sachs Asia had found plenty of negative media reports which indicated high corruption risks associated with 1MDB and which raised questions about the integrity of 1MDB and the transactions it had entered into. 

The SFC’s investigation also found that although the deal team and control functions took note of many of the red flags and appeared to have taken some steps to discuss and address them, Goldman Sachs adopted a piecemeal approach in resolving the issues and had not properly considered the wider and “bigger picture” concerns about the commercial rationale of the bond offerings and satisfied itself that such concerns have been satisfactorily addressed.   

The SFC considers that Goldman Sachs Asia had failed to:

• supervise diligently its senior personnel who were involved in the execution of the bond offerings and to ensure that they maintained appropriate standards of conduct;
• identify and adequately address money laundering and bribery concerns when there were numerous red flags;
• exercise due skill, care and diligence, and act in the best interest of its clients and the integrity of the market when vetting and approving the bond offerings; and
• put in place adequate and effective internal control procedures to protect its clients from financial losses arising from frauds and other dishonest acts or professional misconduct.

In deciding the disciplinary sanctions, the SFC took into account all relevant circumstances, including:

• Goldman Sachs Asia had extensive involvement in the 1MDB bond offerings and received more than one third of the total revenue generated from the three bond offerings;
• there were serious lapses and deficiencies in Goldman Sachs Asia’s risk, compliance and anti-money laundering controls and management oversight which allowed Leissner’s bribery of foreign government officials to completely escape scrutiny;
• Goldman Sachs Asia allowed the bond offerings to proceed when numerous red flags suggesting money laundering and/or bribery had not been properly addressed;
• Goldman Sachs has settled criminal proceedings with the Malaysian government for US$2.5 billion plus a US$1.4 billion guarantee (Note 7);
• since the securities industry is of fundamental importance to Hong Kong’s role as an international financial centre,  it is essential to maintain among members of the investing public a well-founded confidence in the securities industry as well as in the integrity and professional competence of those who are employed in the industry;
• a strong message needs to be sent to the market to deter other market participants from allowing similar failures to occur;
• Goldman Sachs Asia’s acceptance of the SFC’s findings and disciplinary action facilitated an early resolution of the matter; and
• Goldman Sachs Asia undertook to provide the SFC with annual reports prepared by its internal audit function for three consecutive years confirming, among others, that effective remedial measures have been implemented to address the regulatory concerns identified by the SFC in this matter.

End

Notes:

1. Goldman Sachs Asia is licensed under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities), Type 4 (advising on securities), Type 5 (advising on futures contracts), Type 6 (advising on corporate finance) and Type 9 (asset management) regulated activities.
2. 1MDB is a strategic investment and development company wholly-owned and controlled by the Government of Malaysia.
3. Goldman Sachs International is an affiliate of Goldman Sachs Asia based in the United Kingdom and is not licensed by the SFC. 
4. Leissner was licensed under the SFO to carry on Type 4 (advising on securities), Type 6 (advising on corporate finance) and Type 9 (asset management) regulated activities and was accredited to Goldman Sachs Asia between 1 April 1998 and 24 February 2016.  
5. Please see the press release published by the US DOJ on 1 November 2018 and the Information filed in the United States District Court for the Eastern District of New York (Cr. No. 18-CR-439), both of which are available on the US DOJ’s website (www.justice.gov).
6. Leissner has been banned from re-entering the industry for life by the SFC.  Please refer to the SFC’s press release dated 3 July 2019.
7. Goldman Sachs International, Goldman Sachs Asia and Goldman Sachs (Singapore) PTE were charged in Malaysia for making false and misleading statements in the offering documents for the bond offerings.  In August 2020, Goldman Sachs settled the criminal proceedings with the Malaysian government for US$2.5 billion plus a US$1.4 billion guarantee.   

News captured as of:2020-10-22 17:00:13

Source: SFC