Acting Assistant Attorney General Brian Rabbitt for the Justice Department's Criminal Division announces a global resolution in a foreign bribery matter at the Department of Justice in Washington on October 22, 2020. Photo: AFP/Yuri Gripas

SINGAPORE – Goldman Sachs, one of Wall Street’s most powerful investment banks, agreed to a US$2.9 billion settlement with US federal prosecutors and the Department of Justice (DoJ) on Thursday to resolve a sprawling money laundering and bribery probe involving state investment fund 1Malaysia Development Berhad, or 1MDB.

The agreement brings closure to one of the biggest scandals ever faced by the bank, one which saw the looting of billions raised in bond offerings arranged by Goldman and stolen funds landing in the personal bank account of former Malaysian prime minister Najib Razak, who lost re-election in 2018 due in large part to public anger over corruption.

But whether the long-awaited settlement has delivered justice is another question. The bank has consistently denied institutional culpability in 1MDB’s fraudulent dealings. Though humbling, the multi-billion dollar settlement is less onerous than investors had previously feared and shields Goldman from the consequences of a parent-level guilty plea.

Under the terms, the bank will pay a $2.3 billion fine for violating anti-bribery laws and will disgorge $600 million of ill-gotten gains as part of a deferred prosecution agreement for its violation of the US Foreign Corrupt Practices Act, which bans companies in the United States from paying foreign government officials for help in gaining or retaining business.

Brian Rabbitt, the acting head of the DoJ’s criminal division, said the penalty was the largest ever levied for a breach of the Foreign Corrupt Practices Act. Goldman’s subsidiary in Malaysia agreed to plead guilty to the charge, a rare victory for prosecutors that could restrict the unit’s ability to carry out business and perform certain activities.

Goldman’s parent company has never before had to plead guilty in a federal investigation, and the admission of guilt by its subsidiary will not affect its broader business. Penalties the bank has agreed to pay are roughly in line with analysts’ expectations and are well below worst-case scenario investor estimates of as much as $9 billion in global fines.

The headquarters of Goldman Sachs in New York City. The Malaysian unit of the global financial titan pleaded guilty in a US court on October 22, 2020, in the massive 1MDB Malaysian bribery scandal. Photo: AFP/Johannes Eisele

“Goldman Sachs must be breathing a huge sigh of relief,” said Mayra Rodriguez Valladares, a bank and capital markets regulatory consultant at MRV Associates. Total settlements and payouts related to its involvement in the scandal are set to cost the firm more than $5 billion to resolve, the equivalent of about eight months of profit.

“The $2.9 billion fine represents 8% of its total 2019 revenues and 34% of its net income for that same year,” she said. “Moreover, Goldman is significantly above its minimum capital requirements, so it can absorb unexpected losses from shocks, such as big fines of this nature. The bank can totally manage the penalty.”

Goldman’s shares rose 1.4% after the announcement of its agreement with the DoJ and overseas regulators. Despite the impacts of the Covid-19 pandemic on the global economy, the Wall Street bank has reaped bumper earnings this year, with its third-quarter profit of $3.62 billion amounting to nearly double its returns from the same period in 2019.   

“Investors, and more importantly, clients, were anxious for Goldman to have this behind them,” said Frank Troise, Asia regional chief executive officer at merchant bank SoHo Advisors. “While the 1MDB scandal was a blemish on the firm, no one has discounted the ability for Goldman to recover quite strongly from this.”

The bank has also agreed to fines in other jurisdictions to resolve probes into its 1MDB dealings. Goldman’s Singapore unit will pay $122 million and received a 36-month conditional warning in lieu of prosecution for three counts of corruption. The subsidiary was ordered to appoint an external party to conduct a review of its remedial measures.

Hong Kong’s financial regulator also slapped the firm with a record $350 million penalty and reprimanded the bank for ignoring multiple red flags during the sales process of its 1MDB bond offerings and said the firm “lacked adequate controls in place to monitor staff and detect misconduct in its day-to-day operation.”

While the US settlement requires the bank to make improvements on its compliance controls, Goldman managed to avoid any obligation of having a government-appointed monitor to oversee its compliance department, which had been an earlier priority for prosecutors and would have added enforcement heft to the probe’s resolution. 

“I would have insisted on having this imposed on Goldman,” said Valladares. “Having an independent outside monitor could expose weaknesses in their controls in multiple areas of the bank. Without an independent monitor, regulators and investors will never know all the details of how Goldman got away with this scandal.”

Goldman Sachs CEO David Michael Solomon said improvements had been made. Photo: AFP/Olivier Douliery

In a staff memo on Thursday, Goldman’s Chief Executive David Solomon said the bank had already made several compliance improvements and that past executive compensation amounting to $174 million would be clawed back from senior bankers “in acknowledgment of the firm’s institutional failures.”

Soloman added that he and other senior bankers would have their 2020 bonuses reduced. “If Goldman had to admit guilt in the US and had high-level executives been put in jail, that would have had a much bigger effect,” said Valladares. “Yet as usual, white-collar criminals get away with most crimes.”

Goldman helped raise $6.5 billion in three 1MDB bond issuances in 2012 and 2013, roughly $2.7 billion of which US prosecutors say was diverted through offshore bank accounts and shell companies linked to fugitive Malaysian financier Low Taek Jho, or Jho Low, who held no official position at 1MDB but was involved in several of its management decisions.

Accused of being the mastermind behind the theft of billions from 1MDB, Low helped Malaysia’s then-premier Najib set up a political slush fund and is infamous for bottomless spending on luxury property, fine art purchases, movie production investments and extravagant parties attended by supermodels, musicians and Hollywood actors.

Tim Leissner, an ex-managing director at Goldman, and Ng Chong Hwa, a former employee of the same investment bank, were named along with Low in 2018 as the first defendants to face 1MDB-related criminal charges brought by the DoJ. Leissner has described the Malaysian businessman as a key intermediary in negotiating the 1MDB bond offerings.

Goldman Sachs has consistently denied any institutional wrongdoing and has argued that misconduct was limited to a small number of “rogue employees.” It has never been established whether top Goldman executives knew of Low’s involvement as an intermediary or of the hefty kickbacks that were paid to foreign officials to obtain 1MDB-related deals.

But the investment bank controversially collected fees for its work topping $600 million, or about 10% of the bond sales’ value, several times higher than prevailing industry norms that would ordinarily see banks receive a 1% to 2% fee for such transactions. Those outsized earnings raised red flags at the bank and were a warning sign that something wasn’t right.

Goldman’s investment-banking group, led at the time by the bank’s current Chief Executive Solomon, collected the bond sale profits despite documented compliance concerns among the bank’s own regulators over 1MDB’s largely negligible business track record and the unusual no-bid arrangement of the bank’s contract with the Malaysian state fund. 

Malaysian businessman Low Taek Jho, also known as Jho Low, may be hiding in China. Photo: AFP
Malaysian businessman Low Taek Jho, also known as Jho Low, may be hiding in China. Photo: AFP

Low was twice rejected as a client by Goldman’s compliance team because it was unclear how he had amassed his wealth. Though in one instance in 2012, the flamboyant Penang-born businessman met privately with Lloyd Blankfein, Goldman’s chairman and chief executive, in his New York office, an encounter that was scrutinized by the DoJ’s probe.  

Goldman previously defended itself by saying its 1MDB deals were vetted by internal committees, and had claimed it was paid appropriately for the risks it took. The bank also accused members of the former Malaysian government, including Najib, of concealing Low’s involvement as an intermediary and lying about how bond proceeds would be used.

In July, Najib, 67, was found guilty and sentenced to 12 years in jail in the first of five trials related to abuses stemming from 1MDB, though he will remain out of prison until appeals are exhausted. The milestone verdict came shortly after Goldman reached a settlement with authorities in Malaysia to resolve a parallel investigation there.

The bank agreed to a $2.5 billion cash payout to the Malaysian government and pledged to cover any shortfall from the sale of $1.4 billion in assets that have been seized by prosecutors in exchange for criminal charges against the bank being dropped, terms that have led some critics to claim that Malaysia had been shortchanged in the settlement.

Najib’s sentencing has since had broad and destabilizing political implications because the current Malaysian government’s fragile parliamentary majority relies on support from the United Malays National Organization (UMNO), a party whose leaders face similar graft charges and among which the former premier continues to wield political clout.

Throughout his testimony, Najib was adamant that he committed no crime. His defense lawyers argued he was misled by Low, who also denies any wrongdoing, and was the victim of a scam. Low’s whereabouts are unknown, despite being sought by global investigators over his role in the multi-billion scandal. He is often rumored to be in China.

Elliot Brody, a former fundraiser for Donald Trump’s 2016 election campaign, earlier this week pleaded guilty to conspiring to violate foreign lobbying laws after accepting $9 million from Low to persuade the US government to drop an investigation into 1MDB. He faces a maximum prison sentence of five years and has agreed to forfeit $6.6 million.

US authorities’ settlement with Goldman, long regarded as the most connected bank in Washington, is one of the heftiest corporate prosecutions during the Trump administration, with cumulative fines far exceeding the $550 million it paid in 2010 to settle criminal allegations over its role selling faulty mortgage securities in the run-up to the 2008 financial crisis.

The Wall Street firm did, however, agree to a $5 billion civil settlement with federal prosecutors in 2016 to resolve claims stemming from the marketing and selling of those securities to investors. The episode had crimped its US earnings and led to a post-crisis expansion into Southeast Asia, where Goldman first started courting Malaysian officials.

The number of criminal prosecutions has dropped under US Attorney General William Barr. Photo: AFP/Kamil Krzaczynski

The DoJ has reportedly presided over a sharp decline in financial penalties against banks and large corporations accused of malfeasance under Trump, and has overseen a significant decline in enforcement of white-collar crimes such as securities fraud and antitrust violations. That is despite the president’s oft-touted “law and order” credo.

Data published by the New York Times, for example, showed a 72% decline in corporate penalties from the DoJ’s criminal prosecutions, to $3.93 billion from $14.15 billion, during the first 20 months of the Trump presidency compared with the final 20 months of the Barack Obama administration.

Apart from a track record of lighter corporate fines, US Attorney General William Barr had controversially overseen the probe against Goldman after obtaining an ethics waiver from the White House, allowing him to oversee the investigation. The waiver was required because Barr’s former law firm, Kirkland and Ellis LLP, represented Goldman in the case.

Alarm bells over a potential conflict of interest were rang further when Brian Benczkowski, a former partner at the same law firm, was appointed by Trump to head the DoJ’s criminal division, fueling concerns that the bank would face a much smaller fine then it could otherwise have. Benczkowski resigned in July after a two-year tenure in the role.   

Analysts had widely expected Goldman would reach a settlement before November’s presidential election after the bank was reported to have lobbied the DoJ at the highest levels to limit the penalties it would face. Securing a deal has removed any risk of the firm having to renegotiate terms under a Joe Biden administration.

“Goldman Sachs was in a hurry to put this scandal behind it before it had to deal with a new AG and DoJ officials,” said Valladares. “But if Biden-Harrison win, their priority is likely going to be to get a stimulus package and job programs in place. Unfortunately, I doubt that their first priority will be financial and white-collar crime reforms, which are badly needed.”

Leissner and Ng remain the only Goldman employees to be criminally charged in connection with 1MDB. Leissner has pleaded guilty in the US to violating foreign bribery laws, while Ng’s case is pending in a New York court. But the Wall Street bank has once again succeeded in avoiding wider culpability in connection with a sprawling scandal.

“The prosecution of financial misdeeds by large institutions has been utterly lacking for years in the United States and this is just the latest example of a bank being able to pay a big fine with its shareholders’ money to avoid prosecution,” said William D Cohan, author of the bestselling book Money and Power: How Goldman Sachs Came to Rule the World.

“It’s a template that has been in place since the 2008 financial crisis. The settlement is in line with the bank’s litigation reserves and was largely expected to come in at this level. It is terribly embarrassing all around for the bank, and while it is certainly better to have it settled, paying a big fine with shareholders’ money is not the same as justice.”